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Thursday, September 25, 2008

Waiting With Bated Breath

The world is watching what's going on in Washington today, Friday and through the weekend, as Treasury Secretary Paulson, Federal Reserve Chairman Bernanke, President Bush and the US House and Senate try to hammer out a bailout package for Wall Street. I do believe it's blackmail, but there are such things as successful blackmailers.

I've heard this financial bailout called TARP for "Troubled Asset Relief Program", and I've also heard it called MOAB -- The Mother of All Bailouts. Whatever you want to call it, $700 billion is a lot of money. Unfortunately, I don't think it will solve the problem.

Why? Because the crisis on Wall Street is not a liquidity problem as Paulson is saying. Instead, the real problem is massive deleveraging. This is not caused by lack of liquidity, but by risk aversion. In other words, investors no longer want to put their money into risky investment vehicles.

Throwing $700 billion of taxpayers' money at that problem won't solve it. Instead, the government will create cash which it will trade to the banks for assets that (mostly) aren't worth the paper they're printed on. Meanwhile, the real problem will run its own course.

So, we'll probably have to see another bailout after this one. It will be the latest in a long line.

Here are some signs that we are a long way from bottom.

Mike Larson sent me a story yesterday that put a lump in my throat -- "FDIC May Need $150 Bailout as Local Bank Failures Mount". Read that story and tell me it doesn't chill you as well. As one expert cited in the story predicts: "By the end of 2009, about 100 U.S. banks with collective assets of more than $800 billion will fail."

And Larry Edelson sent me a story this morning from Reuters -- "China Banks Told to Halt Lending to US Banks". Does that sound like the end of a crisis to you?

XX UPDATE -- CNBC now says this is not true. I'll let them work it out with Reuters.

Finally, Mr. Mortgage writes that "If defaults remain at roughly $20 billion per month in CA and $50 billion nationally and this new $700 billion bailout is suppose to clean up banks past troubles, what is left for the potential $1trillion in current defaults coming over the next two years?"source:

I think that we have yet to see the biggest floats in this parade of pain, and it is all inflationary -- and bullish for gold.

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