x Abu Dhabi, UAEMonday 24 July 2017

Humpty Dumpty sat on a Wall

In a bank bailout, you can't ask which victims need help, you just drop in the medics and yank them from the wreckage.

Disappointment with the Geithner-Obama bank rescue plan continues to spread, with complaints running from the minor - that it didn't include enough detail - to the major - that it doesn't really offer any new money to the bailout effort. There are also some worries in banking circles that the greater transparency required from banks that receive funds may discourage some of the most needy banks from taking it, thereby muting the effectiveness of the plan. Nationalization, according to some, is the only solution. This may not be an entirely valid criticism of Geithner's plan. Already, regulators are fanning out to conduct "stress tests" of banks to determine which don't need any help, which might need some bridge financing from Uncle Sam and which need to be taken over entirely. This actually sounds like compulsory element of America's bank restructuring needs that has been lacking up until now. In a bank bailout, you can't ask which victims need help. You just drop in the medics and yank them from the wreckage. People in shock are in no condition to evaluate their own condition. The best moment in Paulson's management of this crisis was forcing the largest US banks to take money from Washington. Still, markets are giving the plan a thumbs-down. One flaw in the plan may be that it relies on private money that is already in diminishing supply and that will be in less abundance once banks start writing down their toxic assets down to market when GeithnerBank starts buying them from banks at discounts. This also needs to be made compulsory. We are, after all, talking about what some say is a $3.6 trillion crater in the financial system that is apparently now visible from the moon. Half of that, according to Nouriel Roubini, rests on Wall Street. If there is a danger in the Geithner Plan, it may be that it relies on the Fed to print money. Some are also concerned that the Fed's money creation also involves long-term loans that may become even more inflationary once growth resumes. But others argue that the growth in fiscal borrowing and Fed lending is begin offset by increased savings by US consumers and business - they aren't exactly spending or investing it. The good news is that Congress appears set to pass Obama's now $789.5 billion stimulus package, which could appease markets even though economists say that whether the package works depends largely on Geithner's bank rescue package. Nonetheless, it is massive and will lower taxes for individuals and businesses while funneling massive dosh to the people who build roads and bridges. Time to dig out that old Village People hard-hat. The news out of Washington has strangely rekindled the global flight from risk and into the US dollar and bonds, which would argue against concerns about the inflationary impact of the Obama measures. The market instead seems to be betting that the Obama measures will lead to faster asset deflation outside the US than deflation inside the US as de-leveraging saps more money from global capital markets. The other half of that gaping $3.6 trillion maw, after all, is outside the US. Look at Taqa's earnings for a sign of how rapidly this problem is spreading. Diversification is normally a great hedge; in this crisis it has helped only a tad. It's no wonder that hotels in Abu Dhabi are lowering rates: with oil falling, there's less money to splash around, whether here at home, down the street, on fancy footy teams or feckless bankers. Cash may be king, but the court is looking threadbare.