Time to start bailing
When it comes to saving a sinking ship the only thing to do is pull together, but traditionally bailing was done with buckets not bucks
Horror stories frighten me. But does $700bn really sound like a nightmare? Just $2,000 per person to save the ailing American economy and a political ideology under threat. Maybe, but it ain’t enough.
And herein lies the conundrum for the politicians who must ultimately sell the deal to an increasingly sceptical public.
No one doubts this week that tax payers’ cash will come to the aid of the US finance sector.
Even so, the stock market plunged into turmoil on Friday – the same day the country's largest savings and loans company, Washington Mutual, collapsed in America's biggest banking failure.
The US authorities, led by treasury secretary Henry Paulson, are desperate to secure the $700bn needed to prevent further bank losses.
As talks dragged on far into Friday, Asian stock markets slid, oil prices fell, the FTSE 100 index in London dropped 90.2 points in early trading, and the yen rose more than 1% against the dollar as investors looked for stability.
So why the gloom if investors believe the bail out is inevitable? Three scary words: overpriced real estate.
No amount of dollar is going to save the inflated property market from further slides.
The rescue package may well stave of market deflation in the short term, perhaps even stagflation, but the long term future remains downward.
A fall in property prices of at least 15 per cent is widely anticipated in political and industry circles (perhaps more so in the UK where prices have been slower to fall).
When the crash comes, more institutions will of course collapse as high risk loans strategies are exposed to a climate of deepening debt, and worst of all – enforced and voluntary repossessions and jobs losses. America is already feeling the pain of jobs losses, but it’s spreading.
HSBC - the UK's biggest bank - has announced almost 500 local jobs are threatened as part of a worldwide review of its investment banking division.
More than 1,000 posts across its global banking and markets division could be affected too, while the UK-based mortgage bank Bradford & Bingley has announced a further 370 jobs to go.
While fears surround thousands of UK jobs at collapsed investment bank Lehman Brothers, write-downs from mortgage-backed investments will get worse before they get better.
I don’t believe any amount of multi billion bail outs will be enough to buck the market. The traders, the politicians, the industry leaders know this. They are intent on buying time, not a long term solution.
This is not the end of capitalism, civilisation, or Wall Street. Huge rewards await the finance industry players who are left standing at the end of the current crisis.
The banks will continue to refuse to trade - with another at least - while they look towards the end game.
There will be few finishers in what has become an endurance race. Tax payers cash will offer some liquidity into the dying, parched animal. But the value for investors, both large and small, is to join the long term wait for the property market to return to its true value.
There will be blood.
