Bloomberg Analyst: $700 Billion Bailout Could Balloon to $5 Trillion

[NoUsername]

Conservative House Republicans and economists warn about the toll a $700 billion federal bailout of the financial sector would have on the taxpayers footing the bill. But according to Bloomberg TV analyst Marc Faber, the actual cost could be closer to $5 trillion.

Faber, author of the “Gloom Boom Doom” report, appeared on Bloomberg TV’s Sept. 26 broadcast of “Bloomberg Today” and noted just how small the proposed $700 billion bailout is compared to the overall U.S. credit market.

“So now they try to solve the problem by having this credit bubble actually extended and I think the $700 billion will be like a drop in the bucket because the total credit market in the U.S. is something close to $60 trillion, then you have the CDS market – credit default swap – of around $62 trillion. Then you have the whole derivatives worldwide worth about a notional $1,300 trillion. So the $700 billion is really nothing and the Treasury is just giving out this figure when actually the end figure may be $5 trillion.”

...

Faber told “Bloomberg Today” host Jeremy Naylor the solution isn’t government intervention through a bailout, but to figure out how to eliminate the excessive leveraging in U.S. financial markets.

http://www.businessandmedia.org/articles/2008/20080926110602.aspx

This might sound like a crazy idea but I'm sort of thinking someone in Congress should maybe listen to this guy.

[Junkdrawer]

1. Oh, we're going to learn a whole bunch...on Nov. 5th...

and not a minute before.

[MarjorieG]

2. Immediate crisis is liquidity, and looking again in a few months when Obama takes control.

Refocusing on regulation, and seeing again where our liquidity stands.

[clear eye]

3. Please, DUers, use all means at your disposal to pressure Congress to

buy equity, not bad paper. That's what the Europeans are doing. Paulson may even want a dollar crash because that would mean repayment with cheaper dollars, but the collateral damage will be everyone's college and retirement savings, and Social Security payments that won't begin to be able to keep up with the cost of living. We're talking homeless Baby-Boomers who have been forced out of a shrinking job market and can't live on what they had set up for retirement. If you don't think anything really painful can happen to the large U.S. economy, ask the Argentinians.

[Poseidan]

4. abc

The bailout money provides liquidity. But shouldn't congress also re-regulate, while the bailout money is keeping things moving? If the regulations are put back, won't the bad loans be balanced by a functioning system?

[NoUsername]

5. I'm no expert on this by any means

but since the main problem comes from credit default swaps and derivatives, I don't know that putting regulations back would do anything as I'm not sure these were ever regulated in the first place. Sure, we can institute regulation that states that CDS will no longer be allowed but the big question at the moment is what to do with those that are already out there. One person suggested that the solution is "judicial declaration that the value of any and all credit default swaps is zero." Whether or not that can actually be done, I don't know but since there is $62 trillion of CDS out there, that sounds about as good as anything else that I've heard. Since there isn't enough money in the world to cover them, injecting some liquidity into the system really won't help much. Here's a link to an article on CDS where the author proposed the aforementioned solution. It's on page 5 of the article.

http://www.opednews.com/articles/1/CREDIT-DEFAULT-SWAPS--THE-by-Chuck-Simpson-080924-49.html

Here's what another person had to say about the issue. If you go to the link, scroll down to the entry for Sept 25:

It is the collapse of the derivitives market that looms, trillions of dollars in "credit default swaps" (62 trillion in the Unites States alone, according to the International Swaps and Derivatives Association), basically insurance bonds against losses in other credit instruments, bundled and sold over and over again, like some kind of world-wide Ponzi scheme. It's not just the taxpayers holding the bag here; it is mutual funds and pension plans and savers from here and other nations who are all about to get flattened. So far, every time the true market price of these bonds rears its ugly head, it is pennies on the dollar, and this unveiling is what they have been fighting off since Bear Sterns.

The great lie is that this bail out will 'unclog' the credit pipes--as if other people are sitting around with trillions of dollars ready to buy out junk bonds at above-market prices. This is an almost laughable theory being presented to the people of the United States. "If we buy $700,000,000,000 of these bad, severely overvalued bonds at above-market prices, then others will buy the remaining $61.3 trillion of bad, severely overvalued bonds at above market-prices." Right. Come on, kids..Follow the piper down to the river...

...

There is not enough money in the world to circumvent a massive correction in the market. Literally. That's the problem. There is not a lot of money, actual wealth, at all. There are just a lot of people saying they have money. They hold up a bond that's worth six cents and declare, "This is worth a dollar." You think it is a damnable offense that some family lies on a mortgage application, exaggerating assets, to get a loan? Corporations like Lehman, Fannie and Freddie, AIG, and the whole line up yet to come all did this to the tune of hundreds of billions. But with every default, more of these toxic bonds get found out. You see, the corporations aren't really losing money; they are just being forced to reveal that they didn't have the money in the first place. This is why "the credit" has come to a standstill. That is the usual consequence of lying to your creditors...

http://blog.myspace.com/index.cfm?fuseaction=blog.ListAll&friendID=17986969

I've read a few other articles on this issue and the one recurring theme is that there is just not enough money to bail out this Ponzi scheme. Pumping money into it will only allow a few of those with the best connections to get paid off while the rest are left holding the bag. Declaring them all null and void seems like about the only way out though like I said, I'm no expert on this AT ALL so I don't know what the full ramifications would be if such an action were taken. But no mater how I look at it, the $700B just looks like a payout to some of their rich buddies before the whole thing rears its ugly head again.