The Baseline Scenario

I put in a question. Actually I will be so excited if the question gets through. I am like a 5 year old on these things. I actually have a high respect for her. And a little TMI here, I actually think she’s much more attractive than Sarah Palin. I know, I need professional help.

Sheila:

1.) The problem: Conservatively there are $600,000,000,000,000.00 (600 trillion) in derivatives, $200,000,000,000,000.00 are held by 3 banks here in the US according to this Treasury report (Table 3A) http://www.occ.treas.gov/ftp/release/2009-34a.pdf .

2.) The next catalyst: By spring, if not sooner a “wave” of residential real estate defaults consisting of Option Arms and Alt A’s will wash to shore. http://www.cbsnews.com/video/watch/?id=4668112n. I estimate it will be equal in size to the subprime mess 1.5 trillion in total that caused the crash of 2008. Worse, on top of this wave will be a 3.5 trillion dollar wave of CRE.

3.) The question: Your FDIC can’t even close the 500 banks it should have already closed, what do you think your going to do when the shadow banking system collapses?

do you think the decline of us caused by this financial industry is inevitable? can the descent and responsible public servants, academics, and whatever is left in the country join force to help the inexperienced president?

Will you and Vikram do a celebrity smack down?

All the reasonable alternatives are painful and politically impossible. We are doomed.

Unless, we restructure the tax scode–and yes, that means higher taxes on most, if not all of us, especially those able to pay; reasonable readjustments of benefits; an honest but painful elimination of pork and waste in domestic and defense programs; and the extraction from the finance industry of all the benefits they have received at taxpayer expense. It also means that the taxpayers can no longer subsidize the insurance, automobile and other old-growth industries. We’ve done our bit. If they fail, they fail. It will be painful, but not as painful as an economy that is substantially nationalized and influenced by every tinpot politician in Washington.

TBTF institutions are two big and must be reduced to a point where they are not a threat. Guaranteed activities (commercial banking) must be separated from more risky activities (investment banking, trading, securitization etc.). The latter activities should be financed only by the player-owned equity and publicly-issued debt (with full disclosure of activities, balance sheet and risk). This will undoubtedly result in the contraction, if not demise, of wide-spread use of certain exotic instruments (the issuance and trading of which must be made fully transparent in the meantime). Innovation will follow and will need to be carefully monitored to prevent new abuses, but at least it will be corralled by self-interest and not the “heads I win, tails you lose” rules of the past. Things work much more sanely when risk is fully disclosed and understood, and born by the risk takers, not the public.

But the reforms that follow such a restructuring will be the result of market forces, not micro-managing bureaucrats, pay czars, and ultra-complex regulatory efforts that will be subverted the moment deregulators assume power, if not earlier.

But look at our Congress. As I said, we are doomed!

Higher taxes?

We already work from January until September just to pay the government.

FDR went from 60% to north of 90%, he mandated a 100% tax on those earning above 250k a year but the Suprime Court told him where to go.

With all do respect, you are not looking at the numbers! We are insolvent, all the taxes in all the world will not fix that.

Simon, I don’t appreciate you throwing a dog bone of link love to your friend Paul Solman, so we can listen to 1 question from Felix Salmon and 7 questions from the public. Next time let Paul stir up his owned damned blog traffic, if he can’t stir any up on a nationally run TV show you aren’t gonna save him.