Saw this article Geithner Says Administration Will Ensure Bank Access to Funding and could not help but make a quick note. Bulls??? Until the government knows how much money was lost, there is no way to ensure funding. The premise underlying the actions to date is that the US government can borrow more than the bankers lost (or more than the bank asset holders are going to welsh on in the future). I’m starting to have my doubts.
If the bank assets are never returned, the moral hazard risk of write-downs and forgiveness, the capital will have to be replaced to keep the account holders hole. If the money is not there then the government must begin to make the inevitable phone call to the creditors and say, “Your account balance is now 50% of what you thought yesterday, have a good day.”
This is what other countries have done, the percentage varies, but the model works. This is what’s happened to equity asset holders. Life sucks for a while but then the country moves on. I applaud the hope of this administration that they can avoid those phone calls, but their presumption that the US government can ensure bank capital, get lending started again, and protect bank creditors is starting to sound like malarkey. And I’ve about had it.
Time to get the mattress and cookie jars filled, or better yet, get the printing presses ready. Unemployment may become low if managed appropriately but inflation that’s another matter.