Markets rallied on Friday in the USA as George Bush unveiled plans for a $US 1 trillion bail out of the financial sector. This is no exaggeration because basically the Fed will be forced to cover the losses or exposure of most financial institutions. The reason for this is that the investment banks have counter-party exposure to other investment banks. The bigger problem is that its not just banks. AIG is one of the largest insurance group in the world. It was involved in derivatives trading. This is not surprising. The problem is that exposure is not spread around as they say, its anywhere and everywhere, and its just hard to know where exactly the risk is. Of course it lies with the taxpayer. It always lies with the taxpayer. Those CEOs who made billions playing the market for all they could get to keep their realised gains, including all those options pay-outs. The taxpayer and smaller passive investors just get screwed. That is the redistributive model of our time. The money flows to the banks, the power goes to the politicians, and negotiations between those two 'counterparties' ensure that the major political parties get financed, and the CEOs get to keep their payout, and I can bet you they will be spared prosecution.
The Fed has effectively stepped in as the lender of last resort at least to all the US financial intermediaries. I'm unsure what will happen in the case of British and European central banks, though a similar position can be expected for the financial institutions they manage. The problem is mostly in the USA one would think, but really its not because derivatives are needed by all groups. So what will be the cost? Bush has said it will be $US 1 trillion. The reality is that it could be far more.
The question is - What now? Do banks stop engage in derivatives trading? Does the Fed retain its position as the funder or insurer of last resort? Who knows? Its fair to say that the political system gains a great deal from this system, and so they are likely to fight to save it. Are we going to see a return to a gold standard? Its safe to say no politician is going to voluntarily liquidate these derivative contracts which have added so much liquidity to the market. I would suggest the only thing that would result in a gold standard would be a politician who supported it. Otherwise the issue is too technical for voters to campaign against. A soluition is unlikely to get voter support because its a 'conceptual' problem. The only thing that could change this travesty is a voter revolt. If voters take to the streets to campaign that they are not going to pay taxes to support the banking system, you can bet that would cause problems because it would result in banks again questioning the central banks ability to deliver.
Without a voter backlash, the world will continue under the current system, but it will need to live with higher inflation, higher taxation and subdued earnings. You might wonder how probable is the possibility of a taxpayer strike. I would suggest that its not probable unless there is a financial crisis which would place the burden on taxpayers. Currently there is no great burden on taxpayers. Inflation is another factor that could insight political upheaval. The threat is greatest in the USA because US citizens are actually not obliged to file income tax returns in the USA, but they do. In fact the US courts have occasionally recognised this illegality in the law, but on occasion they have chosen to breach the U.S. Constitution. Breaching the Constitution is considered good sport these days by politicians wanting to retain power. President Roosevelt was the first evil monger in the 1910s. But all politicians to my knowledge seem to celebrate the existence of the welfare state, and thus the system of government that finances it. Ron Paul is the only (Republican) presidential candidate who rejects the current paper money standard.
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Andrew Sheldon www.sheldonthinks.com
The Fed has effectively stepped in as the lender of last resort at least to all the US financial intermediaries. I'm unsure what will happen in the case of British and European central banks, though a similar position can be expected for the financial institutions they manage. The problem is mostly in the USA one would think, but really its not because derivatives are needed by all groups. So what will be the cost? Bush has said it will be $US 1 trillion. The reality is that it could be far more.
The question is - What now? Do banks stop engage in derivatives trading? Does the Fed retain its position as the funder or insurer of last resort? Who knows? Its fair to say that the political system gains a great deal from this system, and so they are likely to fight to save it. Are we going to see a return to a gold standard? Its safe to say no politician is going to voluntarily liquidate these derivative contracts which have added so much liquidity to the market. I would suggest the only thing that would result in a gold standard would be a politician who supported it. Otherwise the issue is too technical for voters to campaign against. A soluition is unlikely to get voter support because its a 'conceptual' problem. The only thing that could change this travesty is a voter revolt. If voters take to the streets to campaign that they are not going to pay taxes to support the banking system, you can bet that would cause problems because it would result in banks again questioning the central banks ability to deliver.
Without a voter backlash, the world will continue under the current system, but it will need to live with higher inflation, higher taxation and subdued earnings. You might wonder how probable is the possibility of a taxpayer strike. I would suggest that its not probable unless there is a financial crisis which would place the burden on taxpayers. Currently there is no great burden on taxpayers. Inflation is another factor that could insight political upheaval. The threat is greatest in the USA because US citizens are actually not obliged to file income tax returns in the USA, but they do. In fact the US courts have occasionally recognised this illegality in the law, but on occasion they have chosen to breach the U.S. Constitution. Breaching the Constitution is considered good sport these days by politicians wanting to retain power. President Roosevelt was the first evil monger in the 1910s. But all politicians to my knowledge seem to celebrate the existence of the welfare state, and thus the system of government that finances it. Ron Paul is the only (Republican) presidential candidate who rejects the current paper money standard.
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Andrew Sheldon www.sheldonthinks.com
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