False hopes

I hope none of the readers of this blog (if there are still any), have any false hopes that the proposed bailout will help the economic disaster we are facing. It is far from a coherent solution to the fiasco. In fact, this bailout more closely resembles the Japanese version of zombifying banks by maintaining artificially inflated asset prices. It failed miserably in Japan and will fail here as well. You must address the underlying fundamentals. There are 3 clear things that must happen to do that.

1) Balance Sheet Transparency - institutions must be forced to disclose all of the assets that they have clearly. No offsheet assets, level 3 assets, etc... Until everyone knows what's on the balance sheet, there will be no confidence in the system. Yes, I know this will collapse some companies, but those companies for all intents and purposes are dead anyways. This bailout will only help keep the weak alive maybe only temporarily, but it is a misallocation of funds.

2) All over the counter derivatives must be placed on an exchange and the counter parties must verify that they are adequately capitalized. These derivatives will still be ticking time bombs regardless of this bailout. You have to have a transparent market to manage this.

3) All institutions must be limited to 12 to 1 leverage at most. There could be a time frame provided for the deleveraging to occur, but it must occur. Leverage ratios above that are unnecessary and completely at odds with any sensible risk strategy.

This is the only way to provide confidence back into the marketplace. The assets underlying these debt products will continue to deflate. They have to. We were at the peak of the greatest asset bubble in history. There is no possible way that current incomes can support the payment streams of these inflated assets. Trying to artificially support that is a joke at best and the joke will be on taxpayers. People may want their houses to stay at the current price, but like it or not, 9 times out of 10 that is just unrealistic. It sucks, but that is the price we pay for artificially low interest rates, loose loan standards and a stagnant income base. The bubble has to burst.

Forcing tax payers to absorb all the risk of a bailout aimed directly at propping up more than likely insolvent companies is criminal. Especially when there are plenty of coherent and sensible solutions to addressing this nightmare.

This bailout achieves only this:

1) Burdening taxpayers with 100% of the risk
2) Maintaining artificially inflated asset prices
3) Maintaining non-transparency at the corporate level
4) Further eroding confidence in the market (delayed reaction)
5) Continued obfuscation of the price discovery process of the free market
6) Weakening the dollar
7) Spurring commodity inflation

Please don't be fooled by any version of this plan. Because of what this plan doesn't address, you can expect trillions more in pain down the road. Only now there may be a few more companies on Wall Street and a few more hedge funds that will survive to bleed this country of more misallocated funds.