We’re nowhere close to being out of the woods yet. A staggering amount of derivatives are still held by five large money-center banks. Late last year the Comptroller of the Currency reported these banks holding $175 trillion of derivatives. Of these, 16 trillion were the notorious credit default swaps (credit insurance).
The Fed and the government have committed $8.5 trillion to rescue the banks. Of this, $3.2 trillion has been allocated (to pay claims?). TARP funds and Mr. Obama’s fiscal giveaway go on top of this. We’re looking at the possibility of ten trillion of new government debt.
Meanwhile, the economy continues to tank. Scary numbers fill the airwaves. GM reported car sales down 57% in January. Bloomberg reported that 19 million U.S. homes stood empty at year end. Shadowstats reports that if we throw out the Clinton administration’s tampering with the report, real unemployment would be 18% in January.
You have to wonder about the viability of credit card debt, student loans and a big chunk of remaining mortgages scheduled to be reset soon. It wasn’t long ago you could buy a house full of furniture and appliances and not have to make payment for 24 months. Who’s eating that? If these credit excesses continue to be liquidated, the bottom can’t be in. We may need many more trillions of government slush.
Eric Sprott, a brilliant Canadian money manager, sums up the worst fears. "As bad as 2008 was, 2009 promises to be a whole lot worse. The problem isn’t just the banking system anymore. The problem is the banking system and everything else. This year, the financial crisis of yesteryear is morphing into an altogether different animal. It’s morphing into a financial crisis that has an economic crisis layered on top of it. In fact, to call the current environment an economic crisis is likely understating the situation. What we really have is a global economic catastrophe. One where weakness only begets more weakness, causing a vicious circle that is proving nigh impossible to reverse in spite of all the world’s financial, economic, and political brain trust throwing everything they have, including the kitchen sink, at the problem….. There will be more and more home foreclosures and credit card defaults, and even more problems in the banking sector, leading to further wealth destruction. There will be even fewer people buying cars, or buying anything for that matter. As consumer spending declines, so will corporate sales, leading to further layoffs, resulting in fewer customers and even weaker sales, etc. It’s a vicious circle… Take no solace in the fact that the government is the buyer of last resort. It is really you who are the buyer of last resort. In the end, people will be even more indebted than they were before, setting the stage for the next crisis; a currency crisis. This is why governments aren’t, and cannot be, the solution."
There are many other reasons why government can’t provide a solution to this or any other problem. Government has no bottom line. Thus, they never think of cutting costs, only of spending more. Without profit or loss, they have no objective standard to measure results. Opinions become their yardstick. Even in the face of failure, they think they’re doing a heck of a job.
Government promotes employees based on educational credentials rather than merit. They limit incentives and creativity with endless numbers of rules and regulations. They hire on the basis of quotas rather than skill or talent. This puts incompetents in positions they do not have the qualifications for. By their nature, entrepreneurs and creative people shun government employment. Government employees crave security, an easy load and the less demanding tasks of bureaucracy. That’s another reason it takes forever to get anything done in government. Imagine the procrastination, waste, lack of oversight and mistakes in passing out hundreds of billions of tax dollars to create jobs. Business creates jobs, government destroys jobs.
To top it off, government employees are all unionized. This gives cover to slackards who can never be fired. It gives them work rules that ensure laziness and kill additional efficiency. It piles one bureaucracy on top of another. It’s one more reason for regulatory failure and government shortcomings.
Sad to say, government isn’t competent enough to regulate, subsidize or solve social problems. Least of all, are they equipped to run the economy or hold a monopoly on money. They can’t save us from the consequences of their perverse interventions in the market caused our economic problems to begin with.