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$2.25 trillion bailout?

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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.

 

8 Comments – Post Your Own

#1) On October 15, 2008 at 11:23 AM, GeneralDemon (21.14) wrote:

Dwot - start having babies.

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#2) On October 15, 2008 at 11:52 AM, MikeMark (29.42) wrote:

Mish also has this link to shed some more light on what's happening. It looks like Paulson has done some retracing.

http://globaleconomicanalysis.blogspot.com/2008/10/compelling-banks-to-lend-at-bazooka.html

Roubini sheds some major light on the whole situation.

Looks to me like cash is the place to be for the next 4 to 18 months.

 

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#3) On October 15, 2008 at 11:55 AM, lquadland10 (< 20) wrote:

Phif a mere drop in the bucket to the powers. I on the other hand am stocking up on food supplies. The car is not such a bad place to live and if I get really hungry I look at the survival shows now airing. Uck........    I can trap rats and eat crickets and Uck........ all kinds of bugs for protein. I know how to collect water using a hole and a rock and a sheet of plastic. I bought the army survival guide and books and jars for canning. Yep life is good.

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#4) On October 15, 2008 at 11:57 AM, zygnoda (27.11) wrote:

Your missed the window with your comment about having babies.

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#5) On October 15, 2008 at 12:40 PM, dwot (52.33) wrote:

lol, lquadland, floridabuilder told me I was a "crazy bird" when I said I had my car full of food supplies...

But then that was about bringing supplys from the south to the north, way better prices.  Some of the things I brought are half price in the south.

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#6) On October 15, 2008 at 1:18 PM, jgseattle (33.97) wrote:

I have been having thie internal arguement with myself about will be have huge inflation due to the expansion of the money supply or deflation due to the unsustanability of asset prices, huge debt burden, and the deleverageing of the economy.

It seems to me you are leaning towards the deflation side of things.  This makes a lot of sense based on you positions in CAPS now being all shorts. 

I wonder how best to position myself for a coming deflationary period?  Once deflation takes hold it is difficult to break because people start to say "Why should I buy now when next week it will be cheaper?"  I wonder how long you think we will experience the deflation?

 

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#7) On October 15, 2008 at 6:14 PM, dwot (52.33) wrote:

jqseattle, I hope it isn't anything like Japan...

I would look to re-enter the housing market I just left at about 2/3rds of the top.  Realistically it has to cut to 40-50% to be affordable, but I would be comfortable in that price range.

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#8) On October 15, 2008 at 8:31 PM, Bilifuduo (98.20) wrote:

Nice article.

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