Banks, Bankers and Bankruptcy

The fixation on the banks and their importance to the world economy, while partially warranted, is causing a distraction to an even greater risk to the world economies and more importantly to the American capital system.

The initial steps to deal with the worldwide banking meltdown appear to have been necessary from this current viewpoint. However, only time will answer the overriding question as to whether or not all that has followed and is yet to come will have been worth it in the end.

From this chair and at this moment, I believe we will judge the permanent fallout of it all to have been a huge mistake that was done without serious consideration to the consequences the Nation will suffer now and long into the future. Most assuredly the next two generations now alive (my children and my grandchildren at least) will be paying for these massive and misguided bailouts and spending programs cloaked as economic stimulus.

Much has been said about deflation being of more concern than the inflation these programs have the potential to generate. Let's leave that argument for another day and focus on why this current path is the wrong path.

The decision to leverage the balance sheet of nations, (and for the rest of this blog I am only going to be concerned with America and its' balance sheet), to the extent that they have been is repeating as a Nation what the banks, hedge funds and many citizens did to help bring on this crisis.

Over leveraging and over spending to an unsustainable level that practically guarantees financial failure.

If the United States were a corporation taking on the kinds of debt and leveraging against its balance sheet as they now have been, warning signs would be flashing on everyone's screens and the accounting firms for that corporation would have to seriously be considering issuing a "going concern" warning on that company. That is what I am doing today folks, this is a "going concern" warning on America.

Why? Doesn't the government have the ability to print as much money as they want/need to manage any amount of debt or leverage that is needed?

To a certain extent the answer is yes, but, what the government actually prints are pieces of paper called T bills, Treasury Notes and other "promises to pay" instruments. Up until recently there was no question as to all of these "promises to pay" being scooped up at every auction where the government made them available. Pension funds, governments, wealthy investors all over the world, corporations and just about everyone in one manner or another and to one level or another wanted to have some of this paper in their portfolios or to serve as an instrument to hold their excess funds.

That is no longer quite the case and it is going to get worse and perhaps sooner than most think.

The GDP of the United States is a little over $15 trillion dollars per year. It will be less this year and for at least the next 2 to 3 years in my opinion as we are in for a long recession followed by a slow recovery.

When we total all of the bailout funds spent, new funds that are going to be needed for additonal bailouts, announced spending by the administration, new spending that will be required by the administration as it moves forward with other programs the new administration has committed to and what the existing debt load is going to cost the nation every year, we are looking at a nation that has the potential to face hard times managing its' finances. By the time this administration ends this term, the US will be in debt to the tune of close to $10 trillion dollars. To put it another way, we will owe close to 70% of our annual GDP. People and corporations in that condition cannot borrow money to buy groceries and if one or more of their creditors calls their loan or raises their interest rate too much, they are bankrupt.

Most of these bailedout institutions are in no better shape than when this started, contrary to what is being said in the news, mostly by them but also by the Secretary of the Treasury and the President.

What is not being said is many of these same banks are in need of additional capital now and many others are going to be soon as the commercial real estate shoe is now untied and is looking like it is the next shoe that is going to drop. When that happens, it is going to require close to another $400 billion of capital to keep them alive according to what I consider to be conservative estimates and they are going to look to the government again for those funds. Sadly, I am sure they will get them.

If it all stops there, which I doubt, just to get back to even, meaning that they lick their wounds, take their losses AND pay back whatever they took from TARP one and likely to be TARP two, just Bank of America alone would have to find close to $200 billion of gross profit in an environment that is "difficult" (as Mr. Lewis stated) and that has been forever changed in terms of what their business is and what it will produce. Please remember, this is just to get back to a point where they have replenished the capital that was lost during this crisis, not to a point where they are growing or profitable.

I could go on about this but I think you see the concern. It might also help you to understand the schizophrenic actions of the stock market as well.

The economy is far from out of the woods and most of these current bankers and the administration are getting deeper and deeper into the woods and do not have a GPS system or a map to determine where they are or where the path out happens to be and I believe they are going to just keep wandering around in the woods because they seem to be comfortable there and believe most of what they are saying.

They are lost and headed to a very nasty and brutal fall off a cliff and if you believe too much of what they are saying and follow them, you could end up falling off that cliff as well.----

There, I said it. Someone had to!