The equity market shed about 4% today based on the milquetoast presentation from our new Secretary of the Treasury. Geithner's plan lacks clarity, vision and the tolerance for pain that the true solution requires, the solution being nationalization of the banking system.
It really is this simple: the banking system borrowed lots o' money and lost its bet. if a bank is levered 10 to 1, a 10% loan loss will cause it to collapse. Several institutions were levered 20 to 1, even 40 to 1. All that is left is to do the math. CDOs mimicked this levered profile in a nice, neat package for other types of accounts to buy.
The destruction of credit is painful, but the only cure. Bailing banks out only promotes retrenchment. Think about real GDP back at the year 2000 levels before any type of credit equilibrium is attained.
The fact that the government wants to foolishly maintain any stock market capitalization for these companies is a farce. Shareholders were the ones who reaped the outsized rewards, they should be the ones to suffer the pain. The taxpayer is the lone sucker in this, stuck with the bills.
This is eerily similar to the strategy that Japan followed years ago. They waited about 5 years before they finally gave in and forced banks to merge en masse or fold. Those 5 years cost their economy 20 years worth of expansion.
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