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Monday, June 30, 2008

How many bailouts does it take to screw in a lightbulb?

Banks. Airlines. Autos. Brokers. All of these industries are grappling with structural issues that are unlikely to improve over the near-term and all are likely heading toward catastrophic failure if something doesn't change soon.

The government in the past has had to bail out the first three industries. Besides being vital symbols of America, the country probably won't run particularly well without airlines and banks. Autos, well... I'm not sure the country runs better with the american auto industry but it does employ an awful lot of people.

That bailout money is going to have to come from somewhere. Iraq would be the most logical choice -- at a cost of $500 billion and counting, our efforts to de-stabilize and then re-stabilize the region on a war of false-pretense seem morally unsound. But yet, the region seems to be destabilizing around us. The higher oil goes, the more brazen Iran becomes. Though we probably don't belong there in the first place, I'm not sure we can leave right now.

It's tough to paint a really positive picture for the economy, particularly for the dollar. I don't know what turns this situation. Lower oil prices would help but that's a bandaid. The wound to the financial system is much deeper than that. We need a massive reduction of risk and leverage. And that's just going to take time and pain. There's no quick fix for it.

I wouldn't want to be President next year. Talk about your disasters. Me. President. Oh, man. Look on the bright side... I guess it could be worse.

3 comments:

drfinn said...

I was having this conversation with the guys in my office the other day and I asked them what harm would it do if a bunch of the Investment banks went belly up.

Psychologically I understand how people would be scared, but what exactly do they do that is desperately needed to run the US economy.

Obviously commercial banks are important but outside of Manhattan and Greenwich real estate is the US economy going to be that much worse off without Lehman, Morgan Stanley, UBS and RBS?

All the guys here said I was nuts that the stock market would go into free fall and the liquidity freeze for companies would put the economy into recession for a long time.

Not the first time I've been called nuts.

David

Roy Howard said...

It seems like we're going to have to find out what happens, doesn't it?

I don't think the Fed can float the CDO market indefinitely. I don't think they should. It's unnatural.

drfinn said...

I'm completely out of the loop so I didn't know anything about these ratchet provisions until I read this report.

Sounds very ugly.

http://www.sprott.com/pdf/marketsataglance/06_2008.pdf

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