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Never before have I learned so much so quickly from my readers as I have now — all just by reading the thousands of comments you have posted on my blog in the past week!
One of your key questions: Will the new Obama stimulus and banking bailouts succeed or fail?
What will be the immediate and ultimate consequences?
What should I do?
Today’s gala edition is my response.
But let’s not waste time digging for causes — the economic blunders of Washington, the financial greed of Wall Street, or the big debts and risky bets by almost everyone.
Let’s also not waste time pointing fingers — the Clinton administration for creating the tech bubble, the Bush administration for creating the housing bubble, or the Obama administration for giving us what promises to be a whole new government debt bubble.
Most important, let’s not waste our breath debating whether the plethora of government actions and programs since 2007 are philosophically right or wrong.
The fact is, they have failed.
In addition to the $152 billion Bush stimulus package in the spring of last year and the $700 billion Troubled Asset Relief Program (TARP) in the fall, the U.S. government has loaned, invested or committed $200 billion to nationalize the world’s two largest mortgage companies, Fannie Mae and Freddie Mac … over $42 billion for the Big Three auto manufacturers … $29 billion for Bear Stearns, $150 billion for AIG, and $350 billion for Citigroup … $300 billion for the Federal Housing Administration Rescue Bill to refinance bad mortgages … $87 billion to pay back JPMorgan Chase for bad Lehman Brothers trades … $200 billion in loans to banks under the Federal Reserve’s Term Auction Facility (TAF) … $50 billion to support short-term corporate IOUs held by money market mutual funds … $500 billion to rescue various credit markets … $620 billion for industrial nations, including the Bank of Canada, Bank of England, Bank of Japan, National Bank of Denmark, European Central Bank, Bank of Norway, Reserve Bank of Australia, Bank of Sweden, and Swiss National Bank … $120 billion in aid for emerging markets, including the central banks of Brazil, Mexico, South Korea, and Singapore … trillions to guarantee the Federal Deposit Insurance Corporation’s new, expanded bank deposit insurance coverage from $100,000 to $250,000 … up to $500 billion in Fed purchases of asset-backed securities … plus trillions more for other sweeping guarantees.
Grand total: Over $9 trillion … and counting!
These efforts were designed to stimulate the economy, avoid a housing bust, restore public confidence, contain the credit crunch, reduce the danger of a global debt collapse, and shore up sinking banks.
But based on the overall net results to date, every single one is an outright, unambiguous, proven failure:
The economy was not stimulated. Quite the contrary, it plunged at an annual rate of 3.8% in the fourth quarter and is expected to shrink by a whopping 5.2% in the first quarter, according to a survey of economists published last week by the Philadelphia Fed.
The housing bust was not avoided; the S&P-Schiller Index of average home prices in 20 metropolitan areas has been falling nonstop for 28 months, with the most recent declines the worst on record. (See S&P’s home price spreadsheet, column W, rows 237-266.)
Public confidence was not restored; it has been sinking nearly nonstop … with the University of Michigan’s Consumer Sentiment Index now hovering close to its lowest level in 28 years.
The credit crunch was not contained; we’ve seen the biggest contraction in credit availability in recorded history — new home mortgages shrinking at an annual rate of $327.5 billion, commercial mortgages shrinking $56.7 billion, commercial paper tumbling $272.6 billion, and corporate bond financing plunging $291 billion. (See Federal Reserve’s Flow of Funds, pdf page 18.)
The danger of a global debt collapse was not reduced; it has actually gotten far worse. The evidence:
- The nation’s 25 largest banks have upped their bets on the single most dangerous form of derivatives — credit default swaps. (See OCC’s latest report on derivatives, page 1, fourth bullet.)
- On average, the nation’s five largest banks — JPMorgan Chase, Bank of America, Citibank, Wachovia and HSBC — have increased their exposure to defaults. At yearend 2007, their average credit exposure to derivatives was 264% of their capital, already extremely dangerous. Nine months later, it had risen to 317% of their capital. (OCC, pdf page 12, bottom line.)
- Similar risks are rising dramatically in Western Europe, Japan and emerging market economies.
In other words, a global debt collapse is even more likely today than it was before the U.S. government began its massive interventions.
The finances of the nation’s banks were not shored up; they have actually gotten much worse. Just look at what has happened and you’ll understand why:
Ever since the nation’s banks were told last year that the federal government was planning to buy up their rotting assets, they’ve been holding on … waiting … hoping.
In the interim, dozens of banks have turned down bids from investors to buy their bad assets at deep discounts. They have strenuously argued that their assets are “worth much more than buyers will offer.” They have flatly refused to accept fair market prices. And government officials have nodded in agreement.
Result: As the housing bust has progressed and the foreclosure epidemic has spread, the value of the banks’ assets has plunged even further … the banks’ losses have multiplied … and the banks’ balance sheets have sunk into an even deeper hole.
Meanwhile, by accepting $45 billion each in federal bailouts, Bank of America and Citigroup — two of the three largest banks in the U.S. — have tacitly admitted that they are failed institutions. They are living on government life support. They are insolvent.
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We used to be alone in this assertion. But now, leading economists are finally recognizing what we’ve been telling you all along. Steve Lohr, writing a lead story on the front page of Thursday’s New York Times, puts it this way:
“Some of the nation’s large banks, according to economists and other finance experts, are like dead men walking.
“A sober assessment of the growing mountain of losses from bad bets, measured in today’s marketplace, would overwhelm the value of the banks’ assets, they say. The banks, in their view, are insolvent.”
In sum …
The Objective Evidence Shows That the Massive Bush
Administration Actions to Save the Economy Have Failed.
Now, the Same Evidence Shows That the Massive
Obama Efforts Are Likely to Meet the Same Fate:
Failure!
Never forget: Everything you see today — the collapsing economy, the failing banks and the continuing danger of a global debt collapse — is happening despite the most numerous, most radical and most expensive government rescue efforts in history.
Yet, rather than recognize their futility, the Obama administration is pushing forward with even larger actions — always with the same general goals (to prevent collapse) and forever using the same blunt instrument (more government money).
The Obama stimulus package is $787 billion, five times larger than the Bush package just one year earlier. They promise larger attempts to save the sinking housing market … more money to avoid an even broader credit crunch … more money to prevent a more catastrophic debt collapse … and more money to shore up banks that have now sunk into an even deeper hole.
How Do Obama Administration Officials Justify
This New, Even Greater Escapade Into the Unknown?
Many of their arguments hark back to Japan of nearly two decades ago …
Obama Argument #1: Japan’s economy was also toppled by a real estate collapse in 1990. But, they say, the Japanese government didn’t do enough. The result, according to this theory, was Japan’s “lost decade” — and, today, 18 years after that bust began, the Japanese stock market and economy are sinking to new lows. To avoid a similar fate, goes the argument, we must act even more decisively.
My rebuttal: In its multi-year efforts to save its economy, the Japanese government built up a public debt of 180% of GDP. To duplicate Japan’s efforts today, we would have to TRIPLE our public debt.
Further, to stimulate its economy, Japan spent $6.3 trillion. Since the U.S. GDP today is 4.6 times larger than Japan’s in 1990, to match Japan’s spending, our government would have to fork up $29.1 trillion. That’s THIRTY-SEVEN times more than the just-passed Obama stimulus package.
And despite that massive outpouring of government money, Japan not only failed to stem its decline, it actually made it far worse, prolonging the agony for nearly two decades.
Obama Argument #2: They say our crisis today is somehow not as severe as Japan’s in the 1990s. So they hold out the hope that it will be easier to overcome.
My rebuttal: Evidence is now pouring in that the current crisis is far worse than Japan’s: Our economy is sinking more rapidly, with deeper deflation, bigger debt collapses and far larger financial losses.
Moreover, in the 1990s, the economic decline was limited mostly to Japan, while other advanced economies of the world were booming, giving Japan’s export economy a major, continuing boost.
Today, in contrast, the entire world is sinking, with unemployment spreading across the globe like wildfire. The lead story in yesterday’s New York Times drives that point home:
“From lawyers in Paris to factory workers in China and bodyguards in Colombia, the ranks of the jobless are swelling rapidly across the globe. Worldwide job losses from the recession that started in the United States in December 2007 could hit a staggering 50 million by the end of 2009, according to the International Labor Organization.”
This is precisely the opposite of the global environment Japan enjoyed even during the worst years of its lost decade.
Obama Argument #3: They say the United States is somehow more capable of handling this crisis today than Japan was in the 1990s.
My rebuttal: Japan of the early 1990s was rich with savings and the world’s largest creditor nation. The U.S. today is devoid of most savings and the world’s largest debtor nation. The facts:
- In Japan, even during the headiest days of its real estate bubble in the late 1980s, the personal savings rate remained close to 14%. In other words, despite the wild real estate speculation raging round them, average Japanese households continued to save at the highest rate of any major industrial nation in the world.
- In the United States, consumers did precisely the opposite. At the peak of the U.S. real estate bubble in the 2005, average American households saved nothing and actually dipped into their savings to buy more homes, cars and other big-ticket items. Thus, while the Japanese personal savings rate was 14% during its real estate boom, America’s was a minus 0.5%, the worst since the Great Depression.
- In Japan, after their real estate bubble burst, the country still had a tremendous storehouse of savings to draw from. So the Japanese government had the resources to pour trillions into the economy. Plus, to help maintain their lifestyle, Japanese consumers had the leeway to save less and spend more.
- In the United Sates today, most consumers have little choice but to do precisely the opposite. With their savings already depleted, there’s simply no room to reduce their savings rate any further. Quite the contrary, they have to scramble to restore their savings. Sure enough, in response to hard times and the fear of worse to come, the personal savings rate in the U.S. has risen to 2.9%. That’s a good thing. But it’s too little, too late to finance a recovery. And with consumers cutting back drastically on their spending, it’s too much, too soon for already-sinking auto sales, retail sales and the U.S. economy as a whole.
See the difference? Setting aside the debate of whether it was the right or wrong policy — and ignoring for now the question of whether it would ultimately fail or succeed — the fact is that Japan could typically afford to spend lavishly to rescue its economy. We cannot.
Obama Argument #4: They say the Japanese authorities didn’t act quickly enough and didn’t spend the money in the right places. Had they only jumped in sooner and smarter, goes the argument, they could have avoided the financial disaster that ensued.
My rebuttal: Japan’s financial disaster wasn’t created by the authorities after the bubble burst. The real disaster was the bubble itself, created in the 1980s, much as the real disaster in our times was the housing bubble of the 2000s.
In 1990, once Japan’s bubble burst, there was no way to reverse the clock and undo history, regardless of how much money was poured, regardless of how soon it reached its mark, and no matter on what specific projects it was spent.
Then and now, the only possible consequence of a great economic bubble was — and is — an equally great economic collapse. More to the point, then as now, the only choice government has is to either …
(a) accept the inevitability of the collapse, get it over with as quickly as possible, and focus the limited resources available on protecting the vulnerable segments of the population from its most extreme consequences …
or …
(b) continue to make futile efforts to hold back the tide, prolong the agony and greatly weaken any subsequent recovery.
Japan chose the latter. And unfortunately, at this stage at least, we are doing the same.
Time to Wake Up and Face the Music
I worked as a financial analyst in Tokyo before Japan’s lost decade and returned several times during the lost decade. I witnessed the bubble first-hand, I studied the collapse up close and I saw the long-term consequences in person. I can tell you flatly:
Japan failed to achieve its goals. And regardless of how we may try to do it differently, it’s financially impossible for the U.S. to match even a fraction of Japan’s efforts. Japan is both an example of what not to do AND, at the same time, an illustration of how little the United States government can afford to do.
Before he passed away, my father, J. Irving Weiss, who started his career on Wall Street as a stock analyst in 1929, explained it this way:
“In the 1930s, I was tracking the facts and the numbers as they were being released — to figure out what might happen next. That was my job. So I remember the numbers well.
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“Years later, economists like Milton Friedman and my young friend Alan Greenspan looked back at those days to decipher what went wrong. They concluded that it was mostly the government’s fault, especially the Federal Reserve’s. They developed the theory that the next time we’re on the brink of a depression, the government can nip it in the bud simply by acting sooner and more aggressively.
“Bah! Those guys weren’t there back then. When I first went to Wall Street, Friedman was in junior high and Greenspan was in diapers.
“I saw exactly what the Fed was doing in the 1930s: They did everything in their power to try to stop the panic. They coddled the banks. They pumped in billions of dollars. But it was no use. They eventually figured out they were just throwing good money after bad.
“You didn’t have to be an economist to understand what the real problem was. It was sinking public confidence, and money didn’t buy confidence. To restore confidence would take more than just money. It would also take time.
“The true roots of the 1930s bust were in the 1920s boom — the Roaring Twenties. That’s when the Fed gave cheap money to the banks like there was no tomorrow. That’s why the banks loaned the money to the brokers, the brokers loaned it to speculators, and the speculation created the stock market bubble. That was the real cause of the crash and the Depression! Not the government’s ‘inaction’ in the 1930s!
“By 1929, our economy was a house of cards. It didn’t matter which cards the government propped up or which ones we let fall. We obviously couldn’t save them all. So no matter what we did, it was going to come down anyway. The longer we denied that reality and tried to fight it, the worse it was for everyone. The sooner we accepted it, the sooner we could get started on a real recovery.”
Today, however, it seems governments of the world have yet to learn this lesson. They’re still trying to bail out nearly every major institution and market on the planet.
Will they succeed?
The quick answer is: For a while, perhaps. They can kick the can down the road. They can buy time and postpone the day of reckoning. They can stimulate stock market rallies and even flurries of economic recovery. But that’s not the same as assuming responsibility for our future. It doesn’t resolve the next crisis and the one after that. It does little for you and me, and even less for our children or theirs.
The longer term answer is: No, they will fail. Ultimately, the market will prevail.
The Triumph of the Market
Our modern markets are stronger than any government, and therein lies the silver lining that will ultimately pave the way to a better future.
Thankfully, despite all the bad news, we still have efficient free transactions — not only in goods, but also in services; not only in assets, but also in debts; not only for private-sector securities, but also for government securities.
And thankfully, despite the government’s intervention, these markets are still efficient and lively. They will rarely deliver prices that sellers like, but they will give us prices that are typically fair.
Moreover, they will give you unprecedented wealth-building opportunities even in the worst of times.
They offer you readily available instruments to make money despite the market’s decline, to make even more money because of the market’s decline and to make still more with the market’s subsequent recovery.
They give you the power to better your life.
And from the thousands of great comments you have posted on my blog, it’s evident that the only major ingredient lacking to make that possible for most investors is confidence.
I’m not talking about confidence in the economy or in our political leaders. No matter how desirable that kind of confidence may be for the country, it’s not going to come unless — and until — it’s truly deserved. Nor is it a prerequisite for your individual success.
The main kind of confidence you need now is confidence in yourself —plus the tools to improve your timing and investment choices. That’s not only possible; it’s quite easy.
That’s why I am holding a free online video summit on Thursday, February 26. And that’s why I feel you must be there.
The details are below.
Good luck and God bless!
Martin
Register for my free online video summit,
Thursday, February 26:
THE 11 LAWS OF BEAR MARKET SUCCESS
How to Prudently Grow Your Wealth
Even When Others Are Losing Everything
In this 1-hour, online video briefing, I’ll bring you quickly up to date with the latest dramatic changes that pose grave new risks — and open great new opportunities — for every dollar you have invested, including …
- The Washington Bailout Disasters: How and when the new stimulus and bank rescue packages will backfire, plus what you must do now to protect your wealth and your family.
- Wall Street Treachery: How big mutual funds, financial planners and Wall Street brokers have dumped pure garbage into your portfolio.
- Main Street Sabotage: Why many of the investments they tell you are “safe” — “too-big to fail” banks, “insured” municipal bonds and junk bonds masquerading as “quality” bonds — are little more than ticking time-bombs set to blow your portfolio apart at virtually any moment.
- Bomb Disposal 101: How to quickly spot and get rid of the landmines concealed in your portfolio.
- Bear Market Bonanzas: Precisely how this bear market gives you hundreds of opportunities to make money more quickly than virtually any bull market. Six types of investments that make that possible immediately.
- The 11 Laws of Bear Market Success: My 11-point checklist for making money in times like these — the rules I follow to determine what I’ll buy or sell, to improve my timing, to lower my risk, and to boost the profit potential in all markets.
This Must-Attend Briefing Is FREE
And Registering Takes Only Seconds …
Just click this link to tell me you’re coming and to make sure we can get you the instructions for attending.
And when you’ve reserved your place, please also jump over to my blog — and tell me the one thing I can do for you at this event that will help you most!
About Money and Markets
For more information and archived issues, visit http://legacy.weissinc.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Michelle Johncke, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
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This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://legacy.weissinc.com.
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