Whatever bailout package emerges will fail unless it takes into account the damage done by short selling. Short-selling permits short-sellers to profit by destroying the share prices of institutions suffering balance sheet problems, thus eliminating their ability to borrow and driving them into failure.
A bailout, however large, that maintains the mark-to-market rule and permits short-selling will pour money into a black hole.
Based on assumptions that do not allow for recession and, perhaps, the full amount of the wars' cost, the US budget deficit is estimated to be in excess of $400 billion. The $700 billion would also be near-term borrowing. This means a minimum of $1.1 trillion in new US borrowing over the course of the year, a sum that could cause foreign creditors to blink.
The bailout would gain credibility if the US budget and trade deficits were addressed as part of the bailout. The US government needs to choose between its financial system and its wars. As the wars serve no US interest except for those of a few powerful interest groups, the government should declare an immediate end to the wars, thus reducing the budget deficit by at least $200 billion annually.
Then there is the military budget, which at about $700 billion is larger than the combined military spending of the rest of the world combined. The only justification for such an enormous amount of military spending is a policy of US world hegemony, a policy that financial collapse makes nonsensical. The defense budget needs to be cut sufficiently to bring the US budget into balance or, better still a $100 billion surplus.
Over the last 20 years the US has made a collection of serious mistakes that may yet prove fatal. With the collapse of the Soviet Union, the US government launched a policy of world hegemony for which it lacked the means. The US government permitted much of its manufacturing base to be located offshore to the point of even being dependent on imports for its military capability.
The US government deregulated the financial sector and permitted the rise of new highly leveraged financial instruments whose failures currently threaten the US with economic collapse.
Economist Herman E. Daly points out that the current crisis is really one of the "overgrowth of financial assets relative to growth of real wealth." Daly believes that "financial assets have grown by a large multiple of the real economy" and that "paper exchanging for paper is now 20 times greater than exchanges of paper for real commodities." Exploding debt liens have simply outgrown the wealth.
Historically, debt that cannot be redeemed has been repealed by inflation. The same inflation that wipes out debt will wipe out savings.
A failed bailout is the worst possible outcome. The chance of failure rises if the US government tries to turn bad private debt into good public debt without regard to the expansion of the public debt.
Excerpted from Paul Craig Roberts @ Counterpunch
