Many years ago when responding to a question I said: ‘Old Sayings are Old Sayings because they have stood the Test of Time’. I have never heard anyone else make this observation – although it is hard to believe I could be the first.  One ‘old saying’ is ‘Desperate People Do Desperate Things’.  I see Henry Paulson’s proposed ‘Balance Sheet Cleansing Plan’ being drafted as this is written (Sunday, September 21) as something along those lines.

In Posts to this Blog on September 13th  and 15th  I talked about:

1.    My concerns with respect to ‘rapid decision making’ on the part of Paulson and Ben Bernanke without them likely understanding all the consequences of their actions.

2.    ‘Waiting and watching’ to see if Paulson’s position on ‘no more U.S. government bailouts’ (made on September 12 in the context of Lehman Brothers) would stand going forward.  It took only until September 17 for Paulson to announced a government loan to American International Group of $85 billion and less than 48 hours later (before Friday’s market opening) to announce the aforementioned Plan which at the time of writing this is estimated to cost in the order of $700 billion.

So what do I now think, only eight days after I wrote about ‘rapid decision making’ and my concern that the solution, if there is one, to U.S. and hence world economic stability rests on the shoulders of debt-laden U.S. consumers who are seeing a continual (now monthly, weekly, or daily) erosion of their home values and savings:

1.    A nation is made up of individuals.  The U.S. economy has grown based on the principal of leverage where equity is supplemented by interest bearing debt.  The balance between the amount of equity and debt at a given point in time is an important determinative of ‘risk’.  Where an equity/debt relationship is out of balance in favour of debt, the  equity/debt teeter-totter eventually must fall over sideways.  U.S. Government debt, debt related to accumulated net trade deficits, and U.S. Consumer debt in combination at unprecedented levels and may well have hit the ‘tipping point’.  If it hasn’t, I believe that at future date it will.

2.    Of great importance, I see the ongoing actions of the U.S. Government as reactionary in circumstances where:

•    it increasing seems that it has either been blindsided by current economic events, or

•    it has taken an ‘ostrich like’ approach because it understood the U.S. economic circumstance, but didn’t have a good plan to deal with it where circumstances now dictate it must.  This scenario seems doubtful to me when I hear things like President Bush’s ‘house of cards’ statement made this past Friday.

3.   To be of any consequence in the context of the root issues of excessive (and by any normal standard in my view, unsustainable) U.S. Government and U.S. Consumer Debt, it seems to me any Congressional Bill currently under consideration to shore up the U.S. Financial System will have to go some distance to altering the fundamental U.S. ‘free capitalist structure’ to a revised system with clear socialistic overtones.

4.    The excesses of the past several years must be controlled in circumstances where ‘Wall Streeters’ have made what in a number of cases I believe fairly can be described as ‘egregious’ income amounts through the creation of debt-based and other ‘financial vehicles’ where arguably no ‘real value’ has been added to the economy by these activities  – unless the promotion of continued U.S. consumer spending and resulting GDP growth numbers is by itself considered to be of ‘real value’ in the long-term.

5.    Apparently Paulson has told U.S. lawmakers that most of the money required to be used in his ‘Balance Sheet Cleaning Plan’ will come back to the Government in the long run.  It will be interesting to see the details of the Plan to assess the likelihood of this having a good prospect of occurring.  I recommend readers follow and continuously assess this closely as it must assume U.S. house prices will on average return to late 2006 – early 2007 levels at some reasonably near-term date.

6.    With events beginning with Bear Stearns in March of this year (only 6 months later a now comparatively paltry $29 billion cost) and the multiple events of the past two weeks, the U.S. Government has already put close to $1 trillion of taxpayer money at risk in an attempt to keep credit flowing.  This amount is about to almost double, without in my view even close to a predicable end in sight.

I think at least one parallel to the circumstances of 1929 bears observation.  It has often been said that very few people saw the Great Depression coming, it simply arose out of the fog like the iceberg the Titanic ran into.  I suggest readers consider the activities of the past two weeks in a similar context.  I sincerely hope the end-game will not be similar.  Personally, even with the so-called ‘Balance Sheet Cleansing Plan’ in place I seriously doubt we will have experienced the end to this highly worrisome saga.

It is close to 8:00 p.m. Sunday, September 21 EST and the Asian markets are about to open.  It will be interesting to see what this coming week has in store.

The views expressed in this Post are those of the author. They are offered to readers for information and general guidance only. They are neither intended to, nor should be taken to, constitute economic or investment advice. See Legal Disclaimer.

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