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Is it capitalism, suckerism, or rescueism?
It sort of began with this assumption that financial engineering could produce money out of thin air and make everyone rich.
People believed that the creation of money by Fed Chairman Sir Alan Greenspan, dutifully shovelled around the world by the Wall Street firms and their dumber and poorer counterparts in the rating agencies - who happily stamped "AAA" on any scroll of toilet paper as long as they got a fee - was real wealth.
But printing a stack of dollar bills that could match the height of the Empire State building every few seconds is not the same as building the actual building. Investors got a wake-up call when they realised that what was really out there was one big bubble - and a fraudulent one at that. German banks were holding mortgages on properties in Florida and California that were 40% lower than what the papers said they were worth. And no one could pay their interest on the mortgages. What was rated as "AAA" low risk was actually a pile of fodder after it has been through a few chews of animal jaws.
The folks on Wall Street and the rating agencies were the capitalists - they maximised their returns and made full use of the opportunity. They did make money out of thin air. They were the ultimate alchemists.
The Germans, the Swedes, the retirees, the pension funds - and many others - were the suckers who were left holding the patsy.
The problem was that many of the Wall Street firms and banks were suckers, too. Having told the Germans how good the toilet paper really was - and repeating the story a million times - they bought their own lies and owned some of that toilet paper!
When it was discovered to be worthless, these Wall Street firms owned billions of dollars of the junk and, because they were worthless, the loss on these mortgages and derivative instruments pretty much wiped out the entire capital of the US banking and financial services industry.
But, hey, how could the smart MBAs be allowed to go bust like the German banks or the Swedish municipality?
And how could these glorified MBAs forgo the Great American Dream of owning a 5,000 square foot McMansion with 3 trophy cars in the garage.
And from that notion of "birthright" was born rescuisim - the new form of economic science which prevents the well connected from going bankrupt.
Or from going to jail.
You may have the worst business model out there, but if you have the connections you will always rake it in.
Change, it is
President Bush began the largest rescue of financial firms in the last few months of his 8-year Presidency.
President Obama, coming in to the White House on a promise of "change" did just that - he changed the Bush rescue plan by making it larger.
Some USD 1.2 trillion of direct new cash/liquidity has been created and another USD 2 trillion - or some such number - of guaranteed debt finds its way onto the US government’s balance sheet. And it is growing.
The numbers are so big, no one seems to care or count the actual number anymore.
The details that should frighten soon become concepts that enamour.
This conceptualising and ignoring the hard facts is manifested in a change in the way people have begun to think.
The change is from rational to irrational.
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Rational investors would demand more interest from the US government for buying more of the seemingly endless stream of new debt that the US government is willing to print. Ben Bernanke, the current chairman of the Fed - the central bank, reportedly made that very clear in his remarks at the Jackson Hole conference. Yet, investors today are willing to lend money to the US Government for 30 years at an interest rate of 3.69%. Bloomberg data indicates that in April 2010 the interest demanded from the US government was 4.84%.
The decline in interest rates (investors are getting paid 25% less interest in August than they were in April) and the strong demand for US Dollars is attributed to the fear over the very existence of the European currency - the only other major source of government bonds out there. The lower interest rates that investors are willing to accept from the US government reflects in the investors’ desire to stay in a "safe" place till the world climbs out of the economic mess. The US government paper is seen as safe - so investors are demanding less interest to own US government bonds.
But given the bail outs and continued rescueism policy of the US government towards its financial institutions, the buyers of US government bonds willing to accept lower interest may be behaving irrationally.
In the years 1999 and 2000, the irrational investors chased internet stocks for their ability to "attract eye balls". Rational investors focused on the lack of real earnings and cash flow. This ensured they stayed away from trouble.
In the years 2005 through 2007, irrational investors chased the "AAA-rated" mortgaged back securities in the belief that home prices could only increase. Rational investors focused on the fact that salaries and incomes were not rising fast enough to sustain the rapid increases in home prices: the affordability ratio. This, coupled with the facts of increasing supply, allowed them to stay away from trouble.
Today, irrational investors are chasing US government bonds. But the government does not have the ability to repay all that new debt given its lower tax collections and other revenue streams which have suffered from a slump in the economy. The biggest buyers of the government debt are foreign governments (about 25% of the total) but also the banks and the insurance companies. When this bubble bursts - there will be a bigger hole out there to dig the world out of as these financial firms holding US debt will again need to be rescued.
Fund flows - and confidence - will again be hit and emerging market stocks will initially be "hit" but, once rationality sets in, the emerging markets in general and India in particular, will recover.
So, while the central banks of the world shuttle from city to city trying to analyse the causes of the world’s economic problems and concocting new solutions, the only surety seems to be that we have discovered a new economic system: welcome to the world of rescuism.
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