$2.25 trillion bailout?
October 15, 2008
– Comments (8)
Mish has a post that gives the $700 billion bailout a $2.25 trillion price tag...
I think the banks should use exceptional caution for new lending, but like Mish says, the economy is severely overbuild which means that profits can go to negative and some of that surplus has to disappear in order for the rest to survive. There is going to be more large losses and banks should save their capital to deal with that.
In this post Mish refers to an interview with Paul Kasriel. That is a good read. I have been in the deflation camp, and I haven't thought world government actions through yet so I am not sure if I will change that opinion once I think things through, but the part of the interview that Mish highlighted is worth highlighting again:
Mish: Would you say that consumer debt in the US as opposed to the lack of consumer debt in Japan increases the deflationary pressures on the US economy?
Kasriel: Yes, absolutely. The latest figures that I have show that banks' exposure to the mortgage market is at 62% of their total earnings assets, an all time high. If a prolonged housing bust ensues, banks could be in big trouble.
Mish: What if Bernanke cuts interest rates to 1 percent?
Kasriel: In a sustained housing bust that causes banks to take a big hit to their capital it simply will not matter. This is essentially what happened recently in Japan and also in the US during the great depression.
Mish: Can you elaborate?
Kasriel: Most people are not aware of actions the Fed took during the great depression. Bernanke claims that the Fed did not act strong enough during the great depression. This is simply not true. The Fed slashed interest rates and injected huge sums of base money but it did no good. More recently, Japan did the same thing. It also did no good. If default rates get high enough, banks will simply be unwilling to lend which will severely limit money and credit creation.
Personally, I think demographics are going to hurt more then people realise. Japan was facing this demographic thing early and I think if you look closer at their economy you will see that their aging population has been well ahead of North America's aging population.
RSS Headlines
Fool UK