We Live In Interesting Times

By now, you have all heard that the bailout, excuse me, "rescue" package has been passed by the House and signed by the President. We've heard all the reasons for passage of the bill, the main one being that "we've got to do something."

But do we have to do something? Historically, the market has always found a way to balance out and those that are long term investors simply see this as a little blip on the horizon. It is the investment houses, banks and short term investors that are feeling the crunch the most, though.

There is an old adage in investing that you do not throw good money after bad, but that is exactly what our government has done. The government has promised to buy up all these bad CDI's that have been horse traded from hell to breakfast. I wish I could get the government to help me on a couple of bad loans.

What is going to happen in the long run? Will this package really help us out of the economic chaos that is undermining our country? I seriously doubt it and to put it in plain terms, it is akin to bandaging an infected cut without doing anything to take care of the underlying infection.

America has lost 159,000 non-farm jobs in the last month moving us to around 850,000 for the year. People, there is still one quarter remaining to be accounted for. We are still in the midst of a huge housing bubble that has many large builders staring bankruptcy right in the bloody eyeballs. Credit is still tight as banks are afraid to loan as no one wants further bad debt on their balance sheet.

So what is this bailout, excuse me, "rescue" package going to do for our moribund economy? The main thing it will do is removing these mortgage based securities, also known as, CDI's off the balance sheets of the banks and other financial institutions that are carrying them. This is supposed to enhance liquidity. Unfortunately, it does nothing to address the underlying shortage of capital that is used by banks for their fractional reserve system of lending.

Now stay with me here, folks. This system of fractional reserve lending means that the banks must only have a fraction of what they actually loan out in reserve. So, the bank that loans you $10,000 need only have $1,000 in reserve. Where does that other $9,000 come from? How about thin air. Then we are charged interest on that thin air. Pretty good racket, especially if you can force the government to cover your bad debts.

So with all that as backdrop for this Economic 9/11, is this bailout, excuse me, "rescue" package going to save our bacon? I'll answer that question with another question. Do you believe that the giving away of $700,000,000,000 to cover some bad debts and ethically questionable decisions, with no oversight, no regulation and no punishment for wrongdoing, immediately turns financial dunderheads into geniuses? Me neither.

Besides, the ARM mortgage meltdown is estimated at more in the neighborhood of 2 - 3 trillion dollars. We're only at the beginning of this mess that has been predicted for a few years now. Do you recall Bush just saying the economy is sound? Remember this when Congress attempts another bailout.