How Tim Geithner's plan to save America really works...
MISTER TIMOTHY GEITHNER was the man who was on watch when the ship ran aground, writes Bill Bonner in The Daily Reckoning.
Geithner's job, as head of the Federal Reserve Bank of New York, was to keep an eye on Wall Street. Now, he's come forward with a new $1 trillion plan to get the boat back on the water. He should have left it to the ship-breakers.
We almost feel sorry for Geithner; Sisyphus had it easier. But Sisyphus was doing honest work. Besides, when Geithner's tour of duty is finished, the public will pay for his jackass bamboozles for decades, while he moves on to a cushy job at Goldman Sachs...or maybe AIG itself, if it is still in business.
Of course, we are out of harmony with mainstream opinion; but we are always out of harmony. When the USS Bubble was steaming along we fretted and warned: it was too heavily laden with debt; it was off course; the captain and his mates were all morons. Then, when it washed up, we switched to a more cheerful song, with the sound of blowtorches cutting her up...and the furnaces melting her down...as background music. Finally, capitalism was doing its job and happily whistling our tune.
But now that we are jolly, the rest of the world is full of doom and gloom. Thomas L. Friedman, writing in the New York Times, tells us that we have a "once in a century financial crisis on our hands..." We can't let capitalism do her work, he says; we have to get this wreck out of the mud and back on the cruise circuit!
So far, America's efforts to borrow its way out of debt have not gone well. The scum gets dredged up from the bottom on Wall Street. But when it is dumped onto the ship, the whole thing just sinks lower. Henry Paulson began the digging with his TARP program in September of last year. Then came TALF. Not to mention various trillion-dollar salvage operations from the Fed. How much do all these rescue efforts cost? The last number we saw – in Barron's – was $14 trillion.
Last week, Mr. Ben Bernanke announced to the whole world that he was doing the sort of thing that people used to be ashamed of. Instead of dredging out the mud, he was going to blow hot air into the rusty hull. And on Wednesday, he began following in the footsteps of pioneers at the Bank of England, the Bank of Japan, and most importantly, the Bank of Zimbabwe. Buying US Treasury debt directly, he will add trillions to the US money supply. Last year, before Lehman Brothers dove in the water and never came up; the entire monetary base of the United States of America measured $850 billion. With so much gas being pumped, it will soon rise to 5 times that amount – or more than $4 trillion.
Daily Reckoning readers may be having as hard a time keeping up with the bailouts as we are. Here, we attempt a simplification.
America still sinks under the weight of more than twice as much debt as usual. The collateral behind that debt has lost about 20% of its value – or about $10 trillion. Normally, those losses should be born by the capitalists – the reckless lenders and investors who extended loans to people who couldn't pay them back. But all of the bailouts have one thing in common: they aim to shift the losses from the people who deserve them to the people who don't...from the culpable to the gullible. Which is why they are so popular. After such a remarkable excursion, many are those who deserve to lose money – from those who bought doublewide trailers they couldn't afford...to those who lent them the money...to those who securitized the debt and passed it out all over town. That's why the biggest problem confronting the salvage workers has been to find some other group of innocents dumb enough and rich enough to pay the bills.
Mr. Bernanke's focused on shifting the burden onto dollar holders worldwide – notably the Chinese – by inflating the currency. But the Bank of China is also America's biggest creditor and has threatened to get upset if the dollar loses too much value. Besides, inflation is no sure thing. As James Ferguson points out, Japan has been trying to incite inflation for many years – with no success.
Until now, Geithner and his boss targeted the taxpayers. Private losses became public losses...as toxic assets were bought up, or backed up, by the government. But when the public got a look at what the bailouts actually paid for – million dollar bonuses, for example – it was outraged. The mob called for Geithner's head; the stingers themselves got stung.
This latest plan has a fairer sound to it, but it is a bigger fraud. "The solution depends on getting private money funds to team up with the government to buy up toxic assets" wrote Mr. Friedman, anticipating the Geithner plan by only a few hours and the truth by an eternity. "The president's comprehensive plan to remove the toxic assets from our ailing banks...is the key to our economic recovery..." he continued.
Geithner has invited investors up to the trough. His plan leaves the government with 90% of the risk; investors will quickly figure out how to get 100% of the profits. The latest estimate tells us that all this salvage work will add $9.5 trillion to the US national debt over the next 10 years. At the current rate, it would still take 20 years to pay it off, even if every dime of savings of every American were applied to the task.
Necessarily, the debt sludge will be dumped on the next generation – who don't vote...and won't notice the smell for years.