The Ben Franklin Report: Pessimism Abounds

With renowned economist Nouriel Roubini of NYU predicting the worst economic contraction in more than 40 years, author Bill Bonner predicting the Dow Jones will fall to 5,000, and some very interesting analysis about the role of credit default swaps in creating some of the worst excesses of the real estate market, it's easy to understand why investors would want to avoid assets in the United States. What's particularly important about the aforementioned analysis, is that it reports that there is a provision in the recently approved $700 billion bailout that allows the Federal Reserve to pay interest on collateral held in exchange for loans. Under this scenario, the financial institutions can give take a loan out at the Fed, offering equity or some of the worst financial derivatives that mathematicians can imagine supported by some of the worst lending since the 1920's as collateral. Then, with the Treasuries or cash that the institution has borrowed, earn profit, and also earn more in interest than the derivative might be worth, thanks to the end of mark-to-market accounting. Which, in summation, amounts to one of the subtlest giveaways in an era of high-priced socialization. 

However, one doesn't need to be an investor to feel worried about the economy. Simply talk to state and local employees and the citizens who rely on their services, in places such as Chicago; King County, WA; Iowa; Maryland; and Massachusetts. In other news, the federal government announced a $455 billion budget deficit for Fiscal Year '08, which doesn't count Treasurer Hank Paulson's commitments to the financial industry, which will push the deficit in '09 even higher, in addition to whatever additional economic stimulus is passed in the coming months. 

There's even more pessimism in whether the announced $250 billion equity binge on nine of the largest financial institutions in America will have any effect on their behavior whatsoever. Despite the investments, up to $25 billion in some cases, the Treasury didn't receive the right to make policy decisions, such as board appointments. So other than hold more meetings and perhaps more begging on one knee, the Treasury's hands are tied.

The Ben Franklin Report: The Bailout Settles In

Just in case you need a reference point to how much the bailout was, consider the number to the right, the cost of the War in Iraq thus far. Yes, the bailout that was passed last week surpasses the amount of money spent on that mistake by leaps and bounds. So, when history is written, how should this period be judged? Where were our priorities? Did we ensure that every child in America had access to primary health care? Were we more concerned about finding a cure for cancer, or spending money on making sure that phone calls and emails didn't contain terrorist-related content?



The bailout and its effects in the market place, in a nut shell. Apparently, today the chaos continues as the first market to open after Bush's signature, the Israeli Tel Aviv Stock Exchange tumbled like a rock going down a sheer slope. 

The fundamental source of the entire financial crisis has been the opaque nature of the books of the biggest financial institutions. The fact that they refused to value assets which, if shown in the light of day, would be revealed to have little revenue potential, will probably end up costing the companies billions in dollars is only being papered over by the bill that the various branches of the federal government approved on Friday. This is further reinforced by new rules from the Securities and Exchange Commission stating that corporations no longer have to price these assets on a 'mark-to-market' basis. That is to say, they no longer have to value them at the price they would likely fetch in a free and open market, but rather can just pencil in whatever they want and use these assets as capital, or as collateral for the various short-term lending programs offered by the Federal Reserve. However, the hanging $55 trillion question in the air is what happens when the Credit Default Swaps start becoming unbundled. For instance, you may remember A.I.G. which met its fate and an $85 billion bailout from the Federal Treasury because of these insurance policies, but has yet to sell a single asset, despite blowing through $61 billion of the money provided in the bailout. Yet their executives party like Nero in Rome. Party on, Wayne. Why worry when none of those responsible for the lending practices will ever be prosecuted? 

So, with some banks saying that they won't even participate in the No Bank Left Behind program and banks that will still fail regardless of their participation, what are we left with? A budget problem that will hamstring the domestic and foreign policies of the next President, whoever it may be, an IRS with undercover investigative powers which will be on the prowl to make sure that every dollar Uncle Sam has coming is brought to the Treasury, and good, old-fashioned rage almost everywhere other than Wall Street.