Five Things To Know About The Bailout

John Mauldin's newsletter has forwarded a summary of a major study of 42 fairly recent banking crises around the world.  The study identifies 124 systemic banking crises between 1970 and 2007, and assembles detailed information on 42 of them, representing 37 countries. (Some countries, like Argentina, appear multiple times.) Their conclusions provide the gold standard against which to judge our bailout, which has halved in size to $350B but doubled in gratuitous add-on's. Democracy in action! 

Citi's take is found here.

Consider these five lessons from recent history:

1. In almost every case, governments took active measures to mitigate the crisis, so there is no real test of whether rescue schemes actually work; no politician seems willing to face the consequences of letting the chips fall where they may.  Implication: whatever happens on the next House vote (Friday), some form of bailout will emerge. 
2. Speed is essential.  Dithering, a la Japan, is a recipe for disaster.  Implication:  The US acted fairly quickly here, within about a year of the first awareness of the crisis; but the "gun to the head" of the last two weeks was excessive haste. 
3. "Pay me now or pay me later." Taxpayers pay for this crisis in one way or another: either a major recession (with high and persistent unemployment, reduced incomes and higher taxes); or government efforts to stabilize the banking system. Implication: The study shows that the costs of inaction are much higher than action.
4. Some types of government intervention work, and some don't. Purchasing bad assets and turning them over to an asset management corporation was tried frequently, but was "not terribly effective"; better results came from recapitalizing banks selectively, meaning supporting those institutions with hope of revival, and letting the terminal go down. This is how J.P. Morgan solved the 1907 Panic in eight weeks.  Implication:  The US bailout is "not a promising strategy" in the words of the report.  Said directly: it won't work.  We may get the worst of both worlds: serious downturn and a second or third round of bailouts. 
5. Targeted relief for distressed debtors helps, although increasing deposit insurance is not that helpful.  Implication:  Some form of Foreclosed People Rescue Agency will emerge, to bailout people, not bankers.  I blogged one such idea here.  As with a bank bailout, there is a good and a bad way of doing this.  The bad way tries to prop up housing prices, while the good way helps the prudent buyers get back on their feet. 

One final item to watch: the scale of this crisis dwarfs all of the others. 

Comments

[dlu]

what happens to United socialist America? Is the super power status gone? Is it a crumbling edifice?

[yelnick]

DLU, we muddle through. This banking panic certainly does not spell the end of US superpower status. From 2003-7 we grew our economy the equivalent of all of China. We are larger than the next three economies combined (Japan, Germany, China). The $350B or eventually $1T this will cost to fix is relatively small for banking panics, at most around 7% of GDP.

The bigger problem is whether the cure proves worse than the disease. Bad policies plunged the US into a long Depression in the '30s, not the initial banking panic itself. We already see from the Demo's the type of anti-capitalistic rhetoric we had in the '30s, and an urge to regulate, tax and redistribute. Obama is no Third Way politician like Clinton; he is more a throw-back to the '60s Liberals. Similarly, McCain's populist rhetoric marks him as no conservative economically, but more in line with Teddy Roosevelt and the Progressive movement of the turn of the last century.

If such rhetoric turns into policy, I would unfortunately then expect a prolonged deflationary depression, out at least five years to 2014, and maybe as far as 2017.

Maybe this shock will knock us out of an odd sort of complacency mixed with fantasy, and we will tend to the fundamentals again (hard work, saving, living within our means).

As one example, I consider Global Warming to be the Eco-Vietnam - a huge quagmire of bad science mixed with incredulous policy that will sink the environmental movement if they don't find a way to declare Peace with Honor and get out. Just consider believing as Al Gore does and Obama sometimes seems to that we can be free of imported oil in 10 years. This would require the equivalent of building 750 nukes.

But we have a very serious set of environmental problems that have nothing to do with GW but everything to do with the inconvenient truth that we have mined, farmed, fished and drilled all the easy resources globally, and will find it ever more expensive to keep going - Peak Everything in a sense. Who is talking about that, and why aren't we working on it?

So I do not fear for The Republic - it is always in crisis - and I see a silver lining in all the gloom of a change of attitude to get back to fundamentals.

[Fork_Master_Serg]

For all impatient Bulls out there - here's the map when Bear07-08
possibly ends ( Thanks to Elliott Wave Forking Theory! ).

Decisive Break above this red dotted line(see image) may sybolize the end of Bear 07-08.
As always - no guarantees!
http://forkoholic.com/images/BearLine0708.jpg

[EN]

Interesting study by Mauldin.

If we can sell-off to 1060 ES (the August 2004 low) I will be going from short to long on my daily positions to catch the bounce. (Neely is waiting until 1000 ES but I doubt he will get filled that low).

I also have major doubts about the end of the commodities bull market. Hence, I have doubts about a deflationary collapse.

In the end, who cares if you are a short-term trader?

Good Luck Boyz and Girlz!

PS - Where is the DOW PREDATOR? I really miss his taunts and insults. . .

[EN]

Hmmm. . . one more thought, Yelnick.

Lessons 1 and 3 are not perfectly congruent. You said:

1) In almost every case, governments took active measures to mitigate the crisis, so there is no real test of whether rescue schemes actually work; no politician seems willing to face the consequences of letting the chips fall where they may.

AND

3) "Pay me now or pay me later." Taxpayers pay for this crisis in one way or another: either a major recession (with high and persistent unemployment, reduced incomes and higher taxes); or government efforts to stabilize the banking system.

But if point 1 is correct, that no politician is willing to let the chips fall where they may, how can we know what a major recession resulted from a failure to act? Yes, you did say, in "almost every case" which infers that there are some cases in which the politicians did let the chips fall, but are such cases a large enough sample to be statistically significant?

Also, assuming point 3 is valid, it still does not address the issue of which choice is worse. In other words, the lesser of two evils should be chosen . . .

Mr. Spock

[yelnick]

EN, I thought about this when posting these five points. The study in that sense is self-contradictory. What has been tested in a slow response (eg Japan) and a fast response (eg Sweden) but not yet no response. "Inaction" perhaps should have been called "forebearance" or "dribbling in half hearted means to keep the status quo afloat." I do not believe any major economy just took the pain, the Austrian-School cure. But the study is fairly clear that a slow bailout to preserve the banks is the worst choice. To boil it down to one rule: let the bad banks fail and prop up the good ones.

[Spiral Calendar]

Major Spiral Calendar Cluster is now due around 9-29 to 10-2

Last year’s top on 10/11/07 plus spiral f12 is 9/29/08
This years top on 05/19/08 plus spiral f8 is 10/01/08
08/11/08 plus spiral f4 is also 10/1/08
09/02/08 plus spiral f2 is 10/02/08

Could see a big rally here as the final f2 spiral should finish up today.

[Spiral Calendar]

Once this f2 spiral ends, Mercury begins a conjunction with the Sun within 5 days (October 7). Historically Mercury/Sun conjunctions are quite bullish.

According to her book, Ronald Reagans Astrologer Joan Quigley would schedule Reagans Press Conferences on Mercury/Sun conjunctions as the public moods would be very upbeat and optimistic from the large solar event. Reagans use of Astrology was part of how Reagan gained his teflon.

How it works is likely a simple solar tide from Mercury. More sunlight causes people to be less depressed. Lack of sunlight causes people to be more depressed.

Ever notice how on bright sunny days the market is usually up? Watch the next 5 days for sunny days and a possible market rally.

Victory from Congress will caus this rally? Nope, it was from spirals and astrology.

[Thom]

Wow! That spiral super astorogly stuff is amazing! It's the most socionomical scientific money-making revelation I've heard in a long time!

Where can I find out more?

[novsboi]

Get on board gentlemen.....

[brian monte]

This is sure be a deflationary depression.
No lending, no credit bank funds frozen and the toppling of the investment banks.
We will have prices which are in the real world not in some cloud cockoo land.

[proud_mother]

I have discoverd a new way of forecasting the markets, it called child elliot wave forecasting.
My three yerar old is given a toy called a rubic snake which she twists.
Next, I then count the wave pattern, the wave at the end of the rubic snake is the most important.
If its an impulse wave then I go out and buy!
My last three trades have been highly successful.
This moment she has thrown away the snake & perfers clifford the red dog. As soon as she turns her attention to the snake I will hit the markets!
WATCH THIS SPACE I WILL KEEP YOU POSTED

[Steve]

Hats of to proud mother - More accurate then the rest of the experts here!
Folks have you read the travel blogs at Yelnick - I have been just reading the one from India and italy and enjoyed them very much. Thats where the goldmine is not in the mombo jumbp of elliot waves.

[ted_the_head]

The media called employees of Goldman Sachs and other investment banks "Masters of the Universe"

Well here is some advice for Hank Paulson and his ilk from a former US Treasury Secreatary

In December 1863, H. McCulloch, U.S. Comptroller of the Currency and later Secretary of the Treasury, wrote to all national banks. Here are some of the paragraphs.

Let no loans be made that are not secured beyond a reasonable contingency. Do nothing to encourage speculation. Give facilities only to legitimate and prudent transactions.

Distribute your loans rather than concentrate them in a few hands. Large loans to a single individual or firm, although sometimes proper and necessary, are generally injudicious, and frequently unsafe. Large borrowers are apt to control the bank.

If you doubt the propriety of discounting an offering, give the bank the benefit of the doubt and decline it. If you have reasons to distrust the integrity of a customer, close his account. Never deal with a rascal under the impression that you can prevent him from cheating you.
?Pay your officers such salaries as will enable them to live comfortably and respectably without stealing; and require of them their entire services. If an officer lives beyond his income, dismiss him; even if his excess of expenditures can be explained consistently with his integrity, still dismiss him. Extravagance, if not a crime, very naturally leads to crime.

The capital of a bank should be reality, not a fiction; and it should be owned by those who have money to lend, and not by borrowers.
?Pursue a straightforward, upright, legitimate banking business. ?Splendid financing? is not legitimate banking, and ?splendid financiers? in banking are generally either humbugs or rascals.?

Mr. McCulloch?s wisdom is as relevant today as it was in 1863. Every credit 101 today preaches those principles. However greed acts to ignore them.

[yelnick]

Stvee - thanks for the kind words. I sometimes ruefully worry that the time I spend in this blog thread takes too much time away from my travel blog.

[Plain_Ewaver]

Back to the wave count, there is still a possibility that the action since Sep 2 is an ending diagonal, of which v started on Thu 2. Count valid as long as 1086 holds.

Otherwise Fri 3 could be the dreaded iii of (iii) of ... of (3).

[Upstart]

Plain_Ewaver,

Thanks for getting back to the count.

[TObject]

Spiral Calendar,
how about Sun-Jupiter square on the 6th?

[Hank Wernicki]

11:06 am

The 9/25 to 9/26 fractal generator for the OEX 60 minute chart is iterating for a TOP

Near 544 --- double top

Waiting for a confirmation ( 1 Hour -- 12:06 pm ) here to short

Stop is last Wednesday's High for the Index near 546 on a 60 minute chart

On 9/29 the index crashed hmmmm that's a Monday

IF this fractal unfolds and stops at current levels today we can probably see a scary panic filled Monday

Flat and scanning for an entry point

Hank

[Spiral Calendar]

TObject wrote>>> Spiral Calendar,
>>>how about Sun-Jupiter square on the 6th?

S-J square shouldnt be a factor just like it often isnt. Sun-Jupiter square on 9/4/2007 occurred on a spike high rally to SPX 1496.40. In 2006 it wasnt visible much at all.

Stick with the spirals here which are calling for a tradeable low between 9/29 and 10/2

[The Spiral Calendar Guy]

So far so good on this f12 Spiral Low.

Amazon has used copies of the Spiral Calendar book for about 14 bucks. Best 14 bucks you could ever spend.

[EN]

I show a good short in the 1175 ES resistance zone with stops up above 1227 ES for multi-day players. Still looking for a panic sell-off to take place.

Good luck to all,

Eric

[maximus]

What does spiral f11 mean on this chart?

http://www.dolefin.com/img/ta41.gif

[Spiral Calendar]

maximus wrote >>>What does spiral f11 mean on this chart?

To calculate the individual spirals (f1, f2, f3, f4 etc.) you use square roots to multiply the moon by fibonacci numbers.

Amazon sells the formula for 14 bucks. Less than a typical stock commission.

[Hank Wernicki]

2:25 pm

Not to scare anyone, get ready for a "Historical Crash" next week.

Hank

[???]

Hank what happened to your IT low and major buy point for new highs into January?

http://yelnick.typepad.com/yelnick/2008/09/the-big-one.html#comment-132862413

[TObject]

I waiting for mine to arrive any day now. ordered Spiral Calendar earlie this week

[wha' appened?]

Hank on 9/30 you said this was a major buy point IT low and new highs into January?

http://yelnick.typepad.com/yelnick/2008/09/the-big-one.html#comment-132862413

Is your 60 minute chart overriding your weekly IT chart?

[Fork_Master_Serg]

Crash next week?

Larry Pesavanto says we might do 1500 to 2000 points down in the DJIA next week (first 4 days) because he says during the first 4 days next week there is an astro aspect that is almost identical to the one that existed during the great panic of 1837 ( a severe banking panic that was followed by a 4 year depression )

http://yorbatv.ning.com/profiles/blog/show?id=2014856%3ABlogPost%3A10045

http://yorbatv.ning.com/profiles/blog/show?id=2014856%3ABlogPost%3A10028