Guest Post: More Debt Won't Rescue the Great American Ponzi

Submitted by Rolfe Winkler, CFA, publisher of OptionARMageddon.com

Policy-makers not only misunderstand the economic crisis, they continue to underestimate it. Consequently, solutions to date have not only failed to "fix" anything, they have made the problem worse. The problem isn't falling asset prices, it's not rising foreclosures, it's too much debt. With an assist from mark-to-market accounting,* too much debt inflated the asset bubble in the first place. Yves has it exactly right that the only "solution" to this crisis is price discovery, to allow asset prices to fall to whatever level they need to in order for markets to clear. This is bad news for over-levered balance sheets, but there's nothing else to be done.

And yet American policy-makers appear convinced that more debt can rescue an economy already drowning in it. If we can just keep the leverage party going, all will be well. $787 billion to fund "stimulus," another $9 trillion committed to guarantee bad debts, 0% interest rates and quantitative easing to drive more lending, new off balance sheet vehicles to hide from the public the toxic assets they've absorbed. All of it to be funded with debt, most of it the responsibility of taxpayers.

Read on...

Did anyone one find any good economic news on the weekend or this morning? Peacenik looked and looked and looked. Peacenik didn't find any. Peacenik is trying to understand why this is happening. Peacenik is trying to understand what a credit default swap is. Peacenik just read the article posted above. It doesn't explain credit default swaps but it does make a compelling case for why the bailouts and stimulus plans will not work.

Peacenik will keep looking for good economic news. But in the meantime the DOW futures are down a lot. The Asian markets continued their march downward overnight. More and more people are contemplating collapse. Peacenik stopped by the Pub yesterday and was shocked to overhear three big believers of capitalism discussing survivalism. Actively planning survival. Peacenik needs to double check his inventory. And visit the seed store. Very Soon.

Failure to Rise

By PAUL KRUGMANPublished: February 12, 2009

By any normal political standards, this week’s Congressional agreement on an economic stimulus package was a great victory for President Obama. He got more or less what he asked for: almost $800 billion to rescue the economy, with most of the money allocated to spending rather than tax cuts. Break out the Champagne!

Or maybe not. These aren’t normal times, so normal political standards don’t apply: Mr. Obama’s victory feels more than a bit like defeat. The stimulus bill looks helpful but inadequate, especially when combined with a disappointing plan for rescuing the banks. And the politics of the stimulus fight have made nonsense of Mr. Obama’s postpartisan dreams.

Let’s start with the politics.

Read on...

It is Friday the 13th and the world economy still exists. Financial Armageddon has been avoided for another week. Peacenik feels a generalized sense of anxiety as Peacenik surveys the financial press. Krugman has a sick feeling in the pit of his stomach as he contemplates the stimulus and the economy. Peacenik is beginning to think that minus some Black Swan event, everything will just unravel, slowly. Just like all of George Bush's efforts were to prevent a total collapse until he was out of office, Obama's efforts will delay the end. Buy time. Hope for the best. But the psychology is locked in. Peacenik doesn't think the public thinks the good old days are coming back. Peacenik thinks more and more people are agreeing with Peacenik. And that is a very worrisome development, on Friday the 13th. Have a good weekend.

The Destructive Center

By PAUL KRUGMANPublished: February 8, 2009

What do you call someone who eliminates hundreds of thousands of American jobs, deprives millions of adequate health care and nutrition, undermines schools, but offers a $15,000 bonus to affluent people who flip their houses?

A proud centrist. For that is what the senators who ended up calling the tune on the stimulus bill just accomplished.

Even if the original Obama plan — around $800 billion in stimulus, with a substantial fraction of that total given over to ineffective tax cuts — had been enacted, it wouldn’t have been enough to fill the looming hole in the U.S. economy, which the Congressional Budget Office estimates will amount to $2.9 trillion over the next three years.

Read on...

Peacenik read a lot about the stimulus plan on the weekend. Peacenik read a list of the stuff that the republicans insisted on stripping out. It was all mildly progressive, good stuff, like food stamps and health care and assistance to students. No one wants financial armageddon. Not even Peacenik. But when you read about the process and you read about the special interests and how they still wield influence it is very difficult to cheer for the success or survival of these cretins. The political process in the U.S. is so broken that it is now counter-productive. The compromise stimulus will fail. The original stimulus might have failed. Do not look in the black hole of debt. Peacenik looked.

On the Edge

By PAUL KRUGMAN
Published: February 5, 2009

A not-so-funny thing happened on the way to economic recovery. Over the last two weeks, what should have been a deadly serious debate about how to save an economy in desperate straits turned, instead, into hackneyed political theater, with Republicans spouting all the old clichés about wasteful government spending and the wonders of tax cuts.

It’s as if the dismal economic failure of the last eight years never happened — yet Democrats have, incredibly, been on the defensive. Even if a major stimulus bill does pass the Senate, there’s a real risk that important parts of the original plan, especially aid to state and local governments, will have been emasculated.

Read on...

Krugman seems to agree with Peacenik's post yesterday that playing nice with the Republicans is a complete waste of time. Krugman seems to think that the stimulus plan has a chance to succeed, to some extent. But notice how dire Krugman thinks the situation is. Of course Peacenik thinks the situation is even more dire. Peacenik thinks it is too late. Peacenik is going to buy a pot and a pan and a pitchfork. Read Naomi Klein's article on how some simple non-violent protest brought down Iceland's government. Peacenik is ready to protest. Are you?