24 trillion ways to break the bank

The crisis in the United States is reaching a silent boiling point in the struggle between the citizenry and the largest banks.  Revealed today in a story breaking across various news agencies, the United States has potentially indebted itself by nearly $24 trillion dollars through various bail out programs since 2007.  This is effectively bankrupting our entire country and if allowed to continue will ruin any chance of a sustainable recovery.  We are already on the heels of a major change in how we live, work and save money.

Debtor nation

If this amount of debt is incurred on a federal level it is twice our GDP.  That is completely out of bounds with any kind of spending plan that is sensible.  It puts the creditors of our nation in to a very difficult position, because they understand we’re debasing the world’s reserve currency to buy our way out of a financial catastrophe instead of facing the pain and making constructive changes.  These $24T in financial commitments could literally strangle our nation’s economy for decades.

Some things never change

Wall Street is back to its old tricks.  Goldman is making “record profits” amid a crisis where its competition conveniently perished under the watch of former CEO Hank Paulson as Treasury Secretary.  Now Morgan Stanley is repackaging subprime mortgage debt as AAA while JP Morgan, Barclays and others are leasing supertankers full of crude oil.  All of these actions are benefiting the banks at the expense of tax payer dollars that provided the cushion so that these companies could continue to sustain their existence.

Time to wake up

Most of the time people turn off the TV, put down the newspaper or close their browser when they encounter the intentionally dull financial news.  They want to focus on the here and now, not projections of profit or bailout recapitalization.  It’s understandable that in a functional society people would have the luxury of ignoring the banking system because they have some implicit trust, a notion of safety, about where their money sleeps.  This relationship should no longer be taken for granted and the institutions holding the dollars we cherish as our future savings may be participating in the largest, most sophisticated power and money grab the world has ever seen.

The Treasury plan’s lack of detail disappoints

The US market had its worst day in 2009 on account of the Treasury’s lack of direction and specifics in their plan to assist ailing financial institutions.  The Dow shrugged off 8000 and the S&P lost the key area of 850.  The only encouraging signs are some end of day short covering in to the oversold condition that was created and that the S&P 500 is still hugging its uptrend line from the Nov ’08 lows.  Other than that the picture looks quite bad.   Geithner had been expected to reveal details and even figures, but instead the market received more rhetoric and promises.

Bernanke wants to party like its 1999

He plans to potentially cut rates to 0%, creating a liquidity trap, much like our friends in Japan did in the late 90s.    This is an absurd solution to a problem that originated with too much cheap credit availability.  It is also naive to speculate with trillions of dollars, mortgaging our next generation’s future for the mistakes of bankers and regulators.

What if it doesn’t work?

There is a strong likelihood that this “fix” will create stability (not necessarily growth) in other asset classes by sacrificing the dollar.  If it doesn’t work, however, we could see a protracted global depression with many central banks already having expended their monetary policy ammunition prematurely.  Japan’s crisis never technically ended.  Their stock markets never regained their 1990 highs.  Since then they have been in a deflationary environment for 18 years.

Won’t the bail outs help the country?

Probably not.  Capitalism was built on the philosophy of letting the strong prosper and the weak fail.  If a company can not make a profit or has made terrible investment decisions, the tax payer should never be held accountable.  Bailing out the weak also stifles real growth and innovation.   Other companies are usually poised to fill the gaps left behind by the weak companies failing with better products or services.

If it won’t help, why try?

Central planning rarely works, but is often utilized in times of crisis to provide moral support.  We are going down a dangerous road that could end in the socialization of corporate America while leaving the middle class to decay.  The favoritism employed by Treasury and Federal Reserve officials to arbitrarily choose what lives and what dies is the polar opposite of free market capitalism.  It undermines the very framework that could have been the solution to our credit woes.

How do you make money in this environment?

So far short term trading, while risky, seems to be more reliable than any buy and hold approach.  Some folks are playing the double and triple leveraged ETFs based entirely off of technical indicators and having good success.  Others are accumulating positions in commodities for what they expect to be an extremely inflationary environment.  My take is that both strategies are applicable, depending on your risk tolerance, time horizon and availability to watch this volatile market.