The Obama trillion-dollar spending stimulus may just be the "tip of the iceberg" of an even more gargantuan government bailout plan if what Nouriel Roubini says is true about the US banking system. Roubini, the economist who predicted the financial collapse a couple of years ago, said this weekend that US banks are "insolvent" calling it a "systemic banking crisis." He goes further to say that problems at Citi, Bank of America and other banks are signaling that the system is essentially bankrupt and that Europe's scenario is very similar.
US banking and brokering credit losses are expected to reach $3.6 trillion which are only capitalized by $1.4 trillion. So now, in addition to the $350 billion leftover from the Bush stimulus package, Obama will likely have to also use his entire proposed trillion-dollar stimulus money to further recapitalize the banking system. With such massive cash-injections and a renowned economist basically declaring the system bankrupt, the so-called prolonged recession is taking on more of a depression outlook although Bush, Obama and others are spinning it more subtly, saying the situation could simply worsen without adequate and prompt funding without actually admitting the “D word" possibility.
If the Great Depression similarly started with massive bank failures one could certainly draw conclusions that the US could be facing another grim period. And, there are other similar and different variables, today. The debate still rages over whether the depression and our current plight was caused by failures in global trade policy, a failure of government to aptly regulate financial institutions or perhaps both. Then, there was little money in supply compared to today’s spiraling, straight-upwards supply the Federal Reserve is continuously and feverishly printing. Then, we had little national debt comparatively, but today our debt is surpassing $11 trillion and this year’s budget deficit will exceed a $1 trillion for the first time in history. Home and business values falling, little credit, cheap goods – all are deflationary and similar to both eras. However, the common bank troubles, job losses, trade and government issues are all exponentially more complex today.
The Treasury’s money-printing presses are running beyond capacity to feed the expense of government, float bank depositories and keep the flow of goods and services moving. Yet, every aspect of the economy reflects a deflationary move in the economy. How can that be? Is there a lag between the massive influx of money and inflationary prices and higher interest rates? Evidently there is. With all that money being injected into the system economic concepts should point towards inflation. So, why haven’t we seen that yet? Hoarding? It happened in the 30’s, too. Some economists believe it’s still coming towards us and the lag will result in “hyper-inflation” – meaning that when it hits it will hit with a vengeance. A loaf of bread could cost $100, interest rates will go up, more businesses will close, unemployment will double or triple, the dollar is likely to collapse and America could find itself in an even deeper and darker depression than the 30’s.
It’s apparent that massive bank-recapitalization will soak up new, unfathomable amounts of freshly-printed money, substantially more than Obama or Congress has resolved needed. Obama’s job creation plan will require an additional trillion just to spur temporary jobs in infrastructure, education and energy – none of which will become available quickly, and possibly too little-too late given the recent predictions of massive retail closings, manufacturing, financial and other job losses in 2009. Obama will probably address the nation soon, warning of the continuing, plaguing problems before taking his case to Congress in an effort to persuade them to pass an even substantially larger stimulus package – now one of trillions instead of billions. Clearly, America’s recovery is going to come with a much higher price tag; and, if it can recover at all and debts repaid, the heavy burden will fall squarely on the fortitude and pocket books of future generations.
related-Cranking up the presses
"Moonlight Cowboy" is a regular contributor to Jer's Place. If you would like to contribute an original article for possible posting contact Jer at jerbearox@yahoo.com -Jer
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