The answer depends on WHO it is that will be helped.
Let’s keep this simple:
There are two sides to the credit equation, the lender (the banks) and the borrower (the people).
Once money has been loaned, there are two and only two ways to get rid of the debt. One way is to pay it back (with interest), and the other is to default.
The aggregator bank idea is to simply peel the bad assets from the remaining “good” parts of the banks and leave the bad assets to fester in a “new” bank that is basically owned by you and me – the government. Was the debt paid back? Was it defaulted? No, it’s still there, and it still must be serviced. All that’s been accomplished is to change who will ultimately take the losses on the loans when they go bad! Sound like a good idea so far?
Guess what, this is a giant circle jerk as the very people who are still in debt as individuals become more in debt in their role as taxpayer. The math doesn’t get better, it gets worse!
…But not if you’re a central banker.
The problem has NEVER been one of LIQUIDITY! It has been one of SOLVENCY all along. The difference being that creating money is easy… signing on the dotted line to take out a loan and to create debt is not a problem, never has been. The problem is generating enough income to pay it back once it’s created.
So, the question becomes which side of the debt equation does our government pour new money into to “solve the problem” – the issuer of debt side (the banks), or the payer of debt side (the people)?
Once the people are debt saturated, giving money to the banks doesn’t solve a thing, it only makes the overall debt equation worse as I made clear in my articles Death by Numbers, and When the Math No Longer Works...
Speaking of math, let’s do a little of that now… So far our government has spent, committed, or guaranteed approximately $8.5 trillion since this latest crisis began. How much is that? It will shock you to know that for each and every one of the 305 million residents in America that it equals $27,868!! For my family of four, that equals $111,475!!!
In my role of taxpayer, I now am shouldering the weight of that math because our government has taken it upon itself to take the bad debts from the banks and move them onto you and me.
So, now let’s turn this equation on its head. Let’s say that instead of the government taking the debts from the banks and moving them onto the taxpayer, that they instead issue a check to every family of four in the amount of $111,475. Now a family who is in debt can use that money to pay back their debts, and a family who is not in debt can go out and buy more crap that’s made in China to stimulate the economy - lol. In this method, the debt at least stands a chance of being repaid and the underlying math may not actually get better, but it won’t be made worse.
Of course there are HUGE problems in doing that too! But IF YOU ARE GOING TO BLOW $8.5 TRILLION, IT’S THE FAR PREFERABLE SIDE OF THE DEBT EQUATION TO HELP! Oh yeah, I can hear you thinking already… SHOW ME THE MONEY!
Show me the money!
Think about how that money would help your own personal situation… if you are a family of 4 who is in debt, it would allow you to pay off debt and thus your FUTURE earnings could be used to buy more things. And if you have been good and are debt free, you can use the money to offset the loss in purchasing power that will result from the inflation that was just created, so that you still maintain a relative advantage over those who were bad actors and in debt over their heads. The good actors would have the money plus they still have their future earnings although those future earning will buy less.
Of course that math is still bad math because you still created $8.5 trillion in governmental debt in order to do it! The difference being that we are creating $8.5 trillion in debt as it stands now that will in no way ever make it into the hands of the people WHO ARE THE ECONOMY.
NO, I DO NOT advocate such a plan. Either method is simply trying to skirt the math and the real problems. In the end, there will be no free lunch, no pain free solution. The rules of economics cannot be violated any more than the rules of math or physics.
Thus, I conclude that the aggregator bank idea will in fact help the banks who have made terrible errors in judgment, it is their intention to create a new cascade of loans and growth through the fractional reserve process, but they will not help the people nor the economy as a whole if the people cannot service the debt they already have.
In order to get the economy growing, this year’s credit creation must be larger than the last, every year – year after year. That math does not work over long periods of time as you will know if you’ve Spent some Time with the Good Dr. Bartlett….
The banks, through the securitization of debt process, saturated the world with debt to the point that current incomes cannot service current debt. How does moving the debt from one bank to another change that equation? It doesn’t.
Money and debt are concepts that were created by people. People can change the way the system works and that must be accomplished and will have to eventually be accomplished. We must be careful in moving forward, and I will present my ideas for doing so in future articles. Part of the ultimate solution will be to show the current crop of central bankers the door and to have them never return. Those who created these problem are NOT capable of fixing them. Unfortunately Obama is surrounding himself with those very people and thus the ideas being generated are still aimed at the banks and not at the people nor in proper systemic CHANGE. I am losing HOPE.
Obama talked about change and taking care of the people, but this is not change and it fixes nothing for the people.
Below is the latest CNN article:
Bank bailout: Get ready for next phase
Economy is getting worse and banks' books are still weighed down with junk. Washington is looking at new solutions that sound familiar.
By Tami Luhby, CNNMoney.com senior writer
Last Updated: January 17, 2009: 4:17 PM ET
NEW YORK (CNNMoney.com) -- It's back to square one.
The deepening financial crisis, which is undermining the government's rescue efforts so far, is prompting federal officials to revisit its original bailout measures. These include taking toxic assets off institutions' balance sheets by moving them into a so-called "bad bank", according to published reports.
As long as these assets remain on banks' books, there's no telling how long their losses will continue and how deep they will be.
Addressing these assets was the original purpose of the Troubled Asset Relief Program, the formal name of the $700 billion bailout plan the Bush administration unveiled as the credit crunch spun out of control. It was later abandoned in favor of taking equity stakes in banks, which was seen as a more direct and rapid way to help.
But as the economy worsens and banks continue to rack up multi-billion dollar losses, the incoming Obama administration will face tough choices in deciding what to do with the $350 billion remaining in the bailout plan. There are many who want a piece of the pie, and there may not be enough money to go around.
David Axelrod, a top adviser to Obama, told Reuters that the administration, which takes office Tuesday, would make an announcement in "the next few days."
Figuring out the next phase
Outgoing Treasury Secretary Henry Paulson said Friday that "a lot of work" has been done on creating a "aggregator bank" and other ideas to leverage the remaining bailout funds to deal with banks' illiquid assets, according to reports. Such a "bad bank" might buy up financial institutions' bad assets, such as mortgage-backed securities, which could stem losses and help rebuild confidence. This is how the federal government first intended to address the credit crisis in mid-September.
Paulson also talked of having the Federal Reserve expand a program to back consumer credit, scheduled to begin next month, and of letting the Fed accept riskier assets, such as commercial mortgage-backed securities. Also, the government could expand its backstop of bank assets as it did for Bank of America, as well as Citigroup.
Meanwhile, Sheila Bair, head of the Federal Deposit Insurance Corp. who will remain in office under Obama, told the Wall Street Journal that federal agencies would like to have "something in place in the not too distant future."
"Everybody agrees it's important to provide some troubled asset relief, because I think it's key to getting private equity capital bank into banks," she told the Journal. "They need to have some certainty about what the tail risk is on some of these assets."
The bank, which would be capitalized with TARP funds, would be similar to the Resolution Trust Corp., which liquidated hundreds of savings and loans in the late 1980s and 1990s, Bair said.
On Tuesday, Fed Vice Chairman Donald Kohn voiced a similar view. And the congressional panel overseeing the TARP wrote last Friday in a report to Congress that events such as November's federal bailout of Citigroup highlight how the toxic asset problem has continued to fester.
Government officials are coming under renewed pressure from financial industry lobbyists, who are pushing them to do more to help banks deal with their bad assets.
"We need to get the markets moving again," said Tim Ryan, head of the Securities Industry and Financial Markets Association. "We have no problem with capital injections, but if you do capital injections without taking care of the bad assets, it just causes the problem to go into hibernation."
Bank losses mounting
The weakening economy is throwing a wrench into the government's efforts to aid the banks. As job losses mount, a growing number of consumers are falling behind on their mortgages, credit cards and other loan payments.
On Friday, Bank of America (BAC, Fortune 500), the nation's largest bank, reported a net loss of $1.79 billion in the fourth quarter of 2008, compared to earnings of $268 million a year earlier. Analysts expected earnings of 8 cents per share.
The loss did not include Merrill Lynch's results. The recently acquired investment bank reported a loss of $15.31 billion, or $9.62 per share. Bank of America cited "severe capital markets dislocations" for Merrill's huge loss, especially late in the quarter.
Citigroup (C, Fortune 500), meanwhile, reported a much bigger-than-expected $8.3 billion quarterly loss Friday, while the beleaguered banking icon also revealed plans to split up into two businesses.
A day earlier, JPMorgan Chase (JPM, Fortune 500) reported net income fell 76% to $702 million, or 7 cents a share during the fourth quarter, from $2.97 billion, or 86 cents a share, during the same period a year ago.
Losing the public's support
Convincing the American public to support more rescue measures may be tough.
A majority of those polled say the government's financial bailout for troubled banks has not worked so far and six in 10 don't want Washington to spend more money on the rescue, according to a CNN/Opinion Research Corporation survey released Friday.
President-elect Barack Obama will have to decide how to parcel out the remaining $350 billion to all the jockeying interests.
In a nod to congressional Democrats, Obama's officials have already committed to spending up to $100 billion on assisting homeowners facing foreclosure, while Federal Reserve Chairman Ben Bernanke said Tuesday that banks will need more capital injections.
However, Obama said it's crucial to help the banks and get them lending to consumers and small businesses again.
"There's no doubt that we needed to stabilize the banking system," Obama told CNN's John King Friday.
Not me! And did you catch this?
"Government officials are coming under renewed pressure from financial industry lobbyists, who are pushing them to do more to help banks deal with their bad assets."Right there is a glimps at the root of the REAL problem!
The aggregator and other ideas mentioned are just another version of the shell game and they are an attempt to kick the can down the road as far as possible. The debts will still be there, and they will have to continue to be serviced or defaulted upon by the individuals who owe on the underlying loans. More debt upon debt – it builds and it builds until it’s culminates in a LANDSLIDE.
Stevie Nicks – Landslide: