Truth, lies and ticker tape

[Dover]

Truth, lies and ticker tape
By Spengler

To bankers and politicians who insist that the world will come to an end if the US Congress does not approve the proposed US$700 billion bailout package, I wish to say: "It is not the end of the world. It is just the end of you." Sadly, it won't be. America's financier caste will live to fleece another day.

There are no atheists in the trenches, and no free-marketeers in Congress after a nearly 10% fall in stock prices. A chorus of erstwhile conservative voices led by the likes of Newt Gingrich, the Republican firebrand of the 1990s, now argues that the proposed $700 billion bailout package is flawed, but it is better to enact it than to do nothing. This simply is not true.

In the event of bank failures, the government will not "do nothing". Two of America's largest banks, Washington Mutual of Seattle, Washington, and Wachovia Bank of Charlotte, North Carolina, were forcibly merged or taken over by regulators during the past several days, without a ripple of disruption to depositors or borrowers.

When a bank runs into trouble, the American government takes it over via the Federal Deposit Insurance Corporation, an entity created during the Great Depression. Why doesn't Congress vote authority for the FDIC to add capital to stricken banks in order to continue their lending operations - after the existing shareholders have been wiped out?

The trouble is that the banking system is insolvent; that is, it lacks sufficient capital to hold its existing portfolio of assets, let alone to make new loans. Its capital is dissolving as loan losses mount. Banks have written off nearly $600 billion of mortgages or securities backed by mortgages during the past year. Against this, they have raised $350 billion in new capital from investors. But investors believe that losses will continue to rise in the mortgage market - and that is before other asset classes begin to decay, including credit cards, and corporate loans...>

http://www.atimes.com/atimes/Global_Economy/JJ02Dj02.html