Busted: Bankers and The Global Economy

October 1, 2008

Economic Bailout Drumbeat: Securities, Transparency & Housing Value

The White House, Treasury Secretary Henry Paulson, Congressional leaders coupled with candidates McCain and Obama, kept up a steady drumbeat of support for the ultimate bailout plan that has yet to materialize. For the moment, the U.S. political perception is that the world markets are stabilized. The reality is that on the surface, stability is a mirror on the pond of finance. Economists discuss among themselves that the reality of life in America remains that the nation is living way beyond its means. Political ideology in the States coupled with irresponsible spending has brought the nation to its knees. Generally, economists long for a pragmatic economic policy that is not driven solely by politics and special interests. An enlightened public is necessary to drive true reform to force politicians to do what they should.

Cutting bankers some slack by buying their bad securities is a bad idea. Is this not like overpricing the junk in your basement to resale as new? Garage sale junk rarely goes up in value. Depending on failed securities to magically increase in value when they are currently worthless is self-deception. Expecting financial junk to appreciate in value when there is no market for it because the premise of that junk is fatally flawed is no less deceptive. Failed banking securities are not wine.

The technical aspects of buying out bad securities is equally problematic. What is worse, depending on Congressional oversight to save the world is an exercise in futility. The lack of “transparency” is the chief issue behind the entire process. There is still no transparency in the process. Designing that transparency on many levels is probably mythical. Nobody within the brightest barrel of economists truly knows how to accomplish this transparency, but readily admit that the possible solution is highly technical.

The basis of the last several decades of wealth creation has been based on the foundation that housing prices could only increase. If U.S. economists had spent any time looking at Japan, most of us  would know the likelihood of truth. A few of us do. Since the crash of the 90s, housing prices in Japan have continued to move downward with no prospect of increase. Real estate is no longer the quality investment that it was in Japan and this nation is looking at the same scenario. ~ E. Manning

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