Whither the markets?

[Joanne98]

How can this be? How can the passage of the Bailout Bill find stocks limping awkwardly into the close? Wasn't this supposed to be our finest hour? The desperate resolution to the year-long crisis? Well, the reality we have tried to reveal here in Minyanville is that the Bailout simply will not work.

The credit markets have spoken. And they are saying - no, they have been saying all along - that the $700 billion Bailout Bill is nothing but a gnat attacking a buffalo. There has been an ongoing disconnect between stocks and credit markets for months now and even the action on Monday did little to correct it.

There is only one thing necessary to understanding what is happening and it is this: no one at U.S. Banks, no one at the Federal Reserve and no one in politics can accept the reality that real estate assets in this country remain oversupplied, overpriced and overleveraged.

It is that simple.

TAF, TSLF, SuperSIV, TARP, none of that matters. No matter what acronym is created to disguise the fact that assets are overpriced, or what government intervention is created to prop up those asset prices, the market will inevitably overpower it. This time is not different. In fact, it is continuing to play out almost exactly as the Great Depression did. The bottom line is that despite the bailout, risk in owning stocks has increased, not decreased.

Keven Depew quoted by Mish

Emphasis added ~ more after the jump.

I would argue that they understand this full well and are trying desperately to prop up RE values. They will do this even at the expense of eventually tanking the dollar because the cost of this project is in the trillions, not hundreds of billions, all in the hope that reflating will preserve nominal asset values. The overall problem, which has gone global, is too big for governments/CB's to bail, even working in concert as they now are at least to a degree.

Depew has it right, the market will overwhelm this attempt to control its inevitable correction. The dislocations are greater than the ability of the government to throw money at it without undermining the currency.

The bailout figure of 700 billion was picked out of the thin air air because the bill allows for virtually unlimited rolling over with no upper limit. The Treasury is going to assume this toxic waste with the plan to revalue it by giving it a Treasury guarantee, with the taxpayers taking the hit and eating whatever defaults emerge.

This doesn't mean that the dollar won't show strength for awhile, e.g., rising against the euro. But the US crisis has gone viral and the global economy is reeling. All fiat currencies are relative to each other, and relative to tangible value. Eventually, as the inevitable correction is put off through monetization, the realization will begin to set in that the monetary system itself, under dollar hegemony, is giving way.

Of course, the authorities could throw in the towel at some point to save the monetary system and let the markets correct. That will entail spiraling deflation and a global depression like no one has ever experienced. There is a lot to correct in addition to residential RE values, and the economy is starting the downturn behind the eight ball on many levels of measurement, especially the degree of leverage measured by the amount of outstanding credit across the board. And the longer the inevitable correction is postponed through intervention, the worse it will be and the longer it will ultimately last.

Another scenario involves the elite starting a wider war as a distraction from the economic pain that is unfolding. This is certainly a possibility, especially should McCain prevail. In the event that OBL mounts another attack in the attempt to deliver an economic coup de grace to the reeling US economy, a knee-jerk reaction is certain whoever is in power, and the country will go to lockdown.

ON the other hand, sanity could prevail and progressive economic measures could triumph either if the elite is willing to quit the field (unlikely), or a politically progressive populist revolt should occur. The later probably won't get any legs until the depression is well underway.

But a depression or war would also likely involve the elite's attempting another round of disaster capitalism to consolidate the corporatist state based on neoliberalism, neo-imperialism, and neocolonialism. This would involve an overt transition from the trappings of liberal democracy to neofascism operating in the open.

The stakes are huge. On one hand, the prize for the elite is control of global wealth and power in the hands of a Western elite. On the other hand, the stake of the people is liberty, equality, and fraternity (community). Economically, it's the difference between focus on national prosperity with distributional justice instead of "growth" as increase in GDP, with the owners of capital capturing the bulk of profits from productivity gains and those at the top benefiting disproportionally from rising asset values.

tjfxh October 5, 2008 - 12:10am

Great Analysis

Though I hope you are wrong about another war being an option. Looking back at the past six years, we might say that the Iraq War has served the role WWI served for Britain. The U.S. is now a spent force militarily, and economically it may not be able to mount another such adventure.

While Mish has it right that this crisis cannot be contained by the financial authorities, it is much more than an overvalued real estate crisis. The entire parallel banking structure has collapsed and every US firm involved is insolvent or in jeopardy. That includes all the big guys on Wall Street, and the big banks engaged in derivatives and securities dealing. It is the overhang of all this illiquid paper, much of it not related to real estate, that has to be taken care of for the economy to recover. As the recession deepens, auto loans, student loans, and revolving credit are going to be dragged into the mix.

Probably the most consistent comment people made in the Depression was "people had no money." I think we are just beginning to get an inkling of what that means for us. There will be no loans for consumers. Cash will be exceptionally scarce, and poverty will be widespread. Demands on the federal government will be immense and largely unmet. America will have a choice to turn away from individualism and Objectivism, towards a philosophy of helping each other, or live in isolation under increased government control to deal with widespread misery.

Numerian October 4, 2008 - 1:24pm

http://agonist.org/tjfxh/20081004/whither_the_markets