Bank Bailout $75 billion isn’t enough

Well here it is. BOA, JPM et al are getting together a fund to “buy out (i.e.., bailout) the blood soaked securities they have been spewing out into the marketplace for years. They understand the likely response of the public. They understand disaster is just days away and they are actually trying to do something about it. While it is doubtful that the $75 billion bailout will itself stop the fall, it COULD spur others into action. The $75 billion is probably 1/10th of what is needed, and even if they get all the players in line, it will mean a series of write-offs over several years (permitted by current regulations and deals with Treasury allowing them to mis-report their earnings). The write-offs will depress earnings and the scare will decrease price earnings multiples and overvaluations of start-up companies. So the market is in for a long haul of bad returns, under the very best scenario. This is future shock and culture shock coming together in the perfect storm. Deferring the cost to future generations was the plan, a greater fool theory driving the Peter principle. Unfortunately, the excess of the last 7 years or so has drained the resources of the government, and the spending (and predatory) spree at the top echelons of corporations has sucked the life out of the purchasing power of the U.S. consumer. That leaves us with about a $2.5 trillion problem over and above the $750 billion created by the credit shock caused by free money. It looks like the piper has to be paid a little earlier than anyone had planned. Templeton, in his off-shore hideaway, is well protected from what will be one of the shakiest economies in history — not because it got into trouble, but because it got so good at getting into trouble and magnified its losses into numbers that are mind-numbing. Hopefully, real estate will not suffer nearly as much as those who are mostly invested in the securities markets. High inflation, high unemployment and high interest rates are likely. Plans like this might soften the landing or defer the crash for a few weeks at a time, but that is the best they can do.

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