$23.7 Trillion Worth Of Bailouts?

Nassim Taleb spoke of definancialization as the main cure to the system.

However, his suggestion would be revolutionary since we cited that financialization is the heart of the US political economic system (and globally) which has operated around the central banking platform, particularly in the US, the US Federal Reserves.

Proof? This from Bloomberg,

U.S. taxpayers may be on the hook for as much as $23.7 trillion to bolster the economy and bail out financial companies, said Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program.

The Treasury’s $700 billion bank-investment program represents a fraction of all federal support to resuscitate the U.S. financial system, including $6.8 trillion in aid offered by the Federal Reserve, Barofsky said in a report released today.

“TARP has evolved into a program of unprecedented scope, scale and complexity,” Barofsky said in testimony prepared for a hearing tomorrow before the House Committee on Oversight and Government Reform.

Treasury spokesman Andrew Williams said the U.S. has spent less than $2 trillion so far and that Barofsky’s estimates are flawed because they don’t take into account assets that back those programs or fees charged to recoup some costs shouldered by taxpayers.

“These estimates of potential exposures do not provide a useful framework for evaluating the potential cost of these programs,” Williams said. “This estimate includes programs at their hypothetical maximum size, and it was never likely that the programs would be maxed out at the same time.”

Barofsky’s estimates include $2.3 trillion in programs offered by the Federal Deposit Insurance Corp., $7.4 trillion in TARP and other aid from the Treasury and $7.2 trillion in federal money for Fannie Mae, Freddie Mac, credit unions, Veterans Affairs and other federal programs.

We shouldn’t forget that the US banking system has been plagued by toxic securities mostly from mortgage lenders, such as Fannie and Freddie and other private labels, thus the encompassing system wide rescue package.

This can clearly be seen in the Federal Reserve’s Balance sheet, where the bulk (brown) of the assets held comprise Federal Agency Debt Mortgage Backed Securities

This reminds us of President Woodrow Wilson who once wrote,

“A great industrial nation is controlled by its system of credit. Our system of credit is privately concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men who, even if their action be honest and intended for the public interest, are necessarily concentrated upon the great undertakings in which their own money is involved and who necessarily, by very reason of their own limitations, chill and check and destroy genuine economic freedom.”

$1 Trillion Monster Bailout For The Euro!

I'm back!

And am vindicated anew!

Coming back from my self imposed exile away from the miasma of domestic politics, I picked this up from media on my way home; this from the Associated Press,

"We shall defend the euro whatever it takes," EU Commissioner Olli Rehn said after an 11 hour-meeting of EU finance ministers that capped a hectic week of chaotic sparring between panicked governments and aggressive markets." (bold emphasis mine)

It's been long argued on this space that policymakers have the innate proclivity to act towards inflationism. That's because of the following factors: inherent addiction to the printing press (or government spending), policy "triumphalism" (recent gains from interim policies), prevailing economic ideology and short term or "career" oriented policy based decisions.

And the political reaction to last week's meltdown was as clinically precise as we had anticipated.

Whether it is the US, China or the EU, the policy approach have all been similar-throw money at the problem- regardless of the long term consequences of their actions.

And it will be no different even for the newly elected authorities in the Philippines.

More from the AP,

(bold emphasis mine)

"The European Union spearheaded a $1 trillion plan Monday to contain Europe's spreading debt crisis and keep it from tearing the euro currency apart and derailing the global economic recovery.

"Central banks around the world joined the coordinated effort to prop up the euro and repel speculative attacks against Europe's weakest countries. The European Central Bank used what analysts called its "nuclear option" — buying public and private debt to shore up liquidity in "dysfunctional" markets and lower borrowing costs.The U.S. Federal Reserve separately reopened a currency "swap" program to ship billions of dollars overseas, pumping more short-term cash into the financial system...

"Under the three-year plan, the European Commission — the EU's governing body — will make euro60 billion ($75 billion) available while countries from the 16-nation eurozone would promise backing for euro440 billion ($570 billion). The IMF would contribute an additional sum of at least half of the EU's total contribution, or euro250 billion."

So the massive bailout is essentially another redistribution from the real economy to the banking system, and to bank related creditors, as well as governments -the Euro version!

But this time with much of the world participating in the monster bailout via the IMF.

Rest assured that inflationary pressures are not limited to one country or region, but a concerted global action. So while the Fed inflates to protect her domestic banking system, the ECB, EU and the IMF along with everyone else are doing the same. We expect any further problems, say in China, to be met by the same response.

It's good to be back and proven right!

Moral Hazard: Citibank's Dubai Loan Portfolio

Marginal Revolution's Alex Tabarrok rightly points out on how the recent bailout of the US financial system has translated to a moral hazard dilemma, as in the recent case of a government protected institution in Citibank "lending" to Dubai.

Mr. Tabarrok writes, ``The problem of moral hazard is often written off as a problem for "the future," less important than dealing with a present crisis. Not so. The bailouts may have encouraged more lending to other places that were perceived as good bailout prospects."

From New York Times' Andrew Ross Sorkin (bold underscore mine): That fact was overlooked by many investors who didn’t want to miss out on a quick buck. What about the risk? The view was, and apparently still is, that if Dubai gets in trouble, its oil-rich neighbors in Abu Dhabi will bail everyone out to avoid damage to their collective reputation and, by extension, the region’s economy. Just as the United States stood behind its banks, in part, to avoid losing the confidence of foreign investors, Abu Dhabi might have to do the same.

``That had to be what Citigroup, with its firsthand expertise with bailouts, must have been thinking when it lent $8 billion to Dubai last year. Oh, and here’s an interesting fact: Citigroup made the loan to Dubai on Dec. 14, 2008. Take a look at the calendar — that’s after it received tens of billions in TARP funds. Citigroup’s chairman, Win Bischoff, said at the time, “This is in line with our commitment to the U.A.E. market in general, and reflects our positive outlook on Dubai in particular.” Good call."

Chart from Wall Street Journal.

Should Dubai default on the $8 billion of debts to Citi, guess who's gonna pay for the losses?