Tuesday, March 24, 2009

"Mission accomplished?"

In response to Monday’s spike on Wall Street sparked by Treasury Secretary Timothy Geithner’s $1 trillion public/private banking bailout scheme, thenation.com’s John Nichols questions whether Geithner is deserving of his supposed hero status so early in the game. “Yes, it is true,” says Nichols, “if you offer a trillion dollars to Wall Street, it will perk up.” However, Nichols explains that it remains to be seen whether Geithner will have more success than the U.K, in what experts have said is the same bailout scheme Britain adopted several months ago.

Nichols cites an article by Dan Roberts, the former US business editor for the Financial Times who now oversees the business sections of Britain’s Guardian and Observer papers. He argues that Britain has already tried this scheme and that it failed miserably. The same toxic asset plan Geithner has set in motion in the US has lead to British headlines today announcing the return of deflation and unemployment, and warning of “horrible things to come.”

For Roberts, the common denominator between the two schemes is the belief that shielding banks from their mistakes will allow them to function normally again and bring the rest of the economy with them. He posits further that both governments seem to believe that the crisis originates from a lack of confidence, and that the solution lies in “correcting the uncertainty of ‘toxic’ debt.” However, the crude reality is that many loaned assets are probably “gone for good,” and “that this is not a liquidity crisis, but a solvency crisis.”

Further compounding the problem is that Geithner’s plan aims to pick up more than just toxic credit securities, including ordinary US loans to institutions originally believed to be outside the scope of the bailout. A similar pattern was observed in the UK as assets meant only for defaulted loans were also put towards buy-to-let mortgages issued by HBOs. If one includes all periled loans in one’s scope, it becomes clear that this crisis may have only just begun.

The market’s newfound confidence in Geithner shows it is confusing the short term with the long term benefits of a colossal financial banking stimulus to the economy. Recklessly printing off money to throw at empty assets could have devastating consequences for years to come. Failing to recognize that could send the U.S down the same road as Britain, which has lead their economy to troubling times.

Check out the article in full by clicking here.

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