by Gayle Plato

(This is an ongoing review of  the current economic crisis)

If we ruin the bond market by trying to borrow more than we have, will we see capitalism die from the toothy chomp of  a blood-sucking vampire? Why IS the Twilight Treasury developing a jugular death bite, convincing us all that the lifeblood of the economy is just the flow of money?

Essentially the government is funded through the Treasury and we have to sell debt.  As you might have heard, the US Government is in the business of toxic soak up with the scam wow theories of bail-out and blot-up.  Yet, as the US Debt grows, there just aren’t enough buyers anymore.  When there’s no trade and the Asian market is full up on our crappy debt,  all has to be sold on the open market.  We must offer higher interest rates, for Quantitative Easing- the creation by a central bank of a predetermined amount of money out of new money.  It is printing presses. We are trying to create liquidity to ease the dried up credit. The FED bids on the debt, and basically the government is buying debt from the government, and money goes from the Treasury to the FED- it no more than a shift of the books.  This can keep happening as long as the general economy is contracting.  If lucky, the USA can inflate the debt away.  Inflation is the result of quantitative easing, and it IS the Obama/Geithner plan.  Truthfully, this is just a version of printing money, and there is an outside chance it will work.

But then the credit default swaps, and the risk of return  guessing done by the magicians who insured the mortgage backed securities, at AIG telling Goldman Sachs and other hedge funds basically bought the farm. See my former post relating to this:
(http://therightwoman.blogtownhall.com/2009/04/09/raroc-_risk_adjusted_return_on_capital_and_toxic_waste_knee_deep.thtml)

Yet, how does the Twilight Treasury swoop in and save Real Estate Investment Trusts (REIT)?  Belly up commercial real estate is just beginning to blood-let, and every bubble is caused by credit. Without credit, there is no purchase, or inflated values. Enter General Growth Properties(GGP)- one of the largest REITs in the country.  They own over 200 shopping malls in 44 states, and also own a number of condominiums across the country. GGP filed Chapter 11, April 16, 2009.

Every commercial real estate developer uses leverage; every corporate owner borrows and owes.  They all have to refinance too and are going into the market. One can sell debt securities, preferred or common stock. Companies always need money and need to roll over loans.  Here is a credit crisis and companies cannot get loans or sell stock.  Private parties do not want to own the bonds or any stock of companies in debt. GGP cannot pay the bills, so they filed for restructure of debt.  This commercial bubble is bursting right now. You may think the mortgage calamity is easing up, but REITs have only just begun to dump and who is going to bail this out? But maybe the bail out is not the real issue.

What if this is not a liquidity crisis? What if it is really a solvency crisis?

If you’re injured and given blood to keep you alive- that is a liquidity crisis. But if a limb is severed, you’ve already bled out, and you cannot be brought back-that is a solvency crisis.  You will read joke comments about zombie banks, or zombie companies like GM, Chrysler,  because they are not suffering simple liquidity problems. The entities are dead.  The unions, and the liberal academics in the Treasury want to keep all in zombie-like walking dead status as they are the vampires, living off of the blood transfusing in.  Bloodsuckers really don’t care  to save the body.  All they want is the blood: OUR BLOOD.

The truth is, the bodies- the bankrupting companies are just dead. Maybe GGP is not going to survive because malls are dead. Put all the money you want in, but if they business is dead, you cannot get the body to live again. This is not liquidity, it is solvency.

Most people in our country are easily swayed by the good-looking vampires lurking around our bloody necks, batting their eyelashes,  looking dreamily into our eyes.  But from dusky twilight sleep comes the dawning.  This power grab is as risky as it gets with the free market body being propped up – Weekend at Bernanke’s. Tim Geithner’s stake in the market feels too wooden, and it’s being rammed into our zombie hearts.

“As more data emerges…the real risk to the Bailout program is in fact the liability side of the
balance sheet. The bottom line is that every dollar printed by the Treasury directly goes to fund
(and dilute) a dollar in deposits, bypassing M1-M3. If the $8 trillion pool in total deposits realizes
that it is supported by assets which even the government is saying are worth fractions on the
dollar, the risk of a wholesale systemic bank run becomes unstoppable even with all the
government backstops in place, as the latter will be contingent on continued willing recipients of
those rapidly devaluing pieces of paper known as U.S. Treasuries and once that assumption is
questioned or outright proven false, all bets are off.”
(http://zerohedge.blogspot.com/2009/04/bail-out-for-dummies-part-1.html)