Unintended Consequences

Story

I’m really coming to the conclusion that Geithner is an idiot, not just a misguided globalist who wants the IMF to run the world.

While he and the Federal Reserve’s Bernanke are holding interest rates as close to zero as is possible, Geithner now says he wants Americans to save more.   Why would people save more money to earn 1% interest? or lock in for a longer term when most people expect inflation to come back at some point?

At the same time we are being told to save money, the government is urging us to buy stuff we can’t afford (new cars, houses, appliances) to stimulate the economy.   The government itself is spending money like a drunken Pelosi, and is considering a second stimulus package.

None of this makes any sense.

By now, you probably have noticed the pattern – every Friday, the FDIC shuts down a handful of banks, usually allowing another larger healthier bank to take over the accounts and branches of the failed bank, and the bigger bank gets to pick and choose which of the assets of the failed bank they would like to buy, and the FDIC throws in enough cash to make the deal work.    If the FDIC just shut down the bank, and mailed everyone a check for their bank balance, that is more disruptive to the customers and ends up costing the FDIC more money.

According to John Batchelor’s sources, there are at least 700 “zombie banks” that need to be shut down right away, and the longer they linger in insolvency, the more the eventual damage will be.    The FDIC has limited staff to supervise these transactions, especially if the FDIC is picking up toxic assets for eventual sale.    At 3-5 banks per week, the FDIC will never catch up with problem

Why aren’t the healthy banks buying up their smaller failing competitors to gain customers and market share?   The answer is obvious – the FDIC is providing an incentive if the bigger bank waits until the FDIC approaches them and wants to make a deal.   If the “good” bank pursued a failing bank on its own, not only won’t it get FDIC money, it will potentially face lawsuits and anti-trust from the U.S. Justice Department.    When the proposed sale is made known to the public, depositors  in the failing bank with create a “run” on the bank, stripping it of the deposits the bigger bank wants to buy.

“Subsidize failure, you get more of it”.

Joey Reynolds and his guests were talking about the state of the economy, and while they didn’t necessarily come up with any brilliant solutions, they did do a pretty good job of framing the problem.

President Obama and Tim Geithner are pursuing that the only way to avoid disaster is to take the debt making machinery and push the pedal to floor.  If we just give away enough free stuff, the economy will turn around, real estate and the stock market will bounce back and the increase in economic activity will ultimately take care of the debt.

But the American people (and Joey’s guests) are slamming on the brakes.  We view debt as the problem, not the solution.  All of the rapid change and uncertainty is paralyzing decision making and forcing lots of money into short term investments to tread water – not just individuals but businesses and developers.    But the problem is that if people become frugal and cut spending to the bone, reduce personal debt and save money, the economy slows, unemployment goes up, and the government deficit explodes.  The country is addicted to debt and overconsumption.   Stopping that cycle suddenly could be catastrophic.

Until and unless people think the future is predictable, many people will stay in full defensive made, protecting their future survival.   President Obama needs to slam the brakes on the change machine if there is any chance for the economy to begin to adjust and heal.   The best thing he could do is take a long vacation and stop holding daily media events and give up the “we must do something fast or else” rhetoric.