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“THE ECONOMY HAS TO TURN AROUND”

In an interview on CNBC Ken Lewis, CEO of Bank of America says the bailouts have  not worked because “the economy has to turn around”.  This is the vital flaw in the reasoning behind the “aggregator bank” plan and the stimulus plan.  Japan did the exact same thing.  Rather than nationalize the banks and take the losses they waited to see if the economy would turn around and bail them out.  It never did and the result was 20 years of falling stock prices.  We are playing a very dangerous game here.  If the global economy picks up steam in the coming months and bails us out I think the U.S. will dodge a bullet (more like a missile) and these programs will look like great successes.  But the biggest risk here is a long L-shaped recession that results in further weakness and more problems down the line.  In that scenario we will surely end up Japanese.

Imagine a doctor who has a heart attack victim enter his ER.   He diagnoses the problem and comes to the conclusion that there is a 50% chance the heart will fail in the next 12 months.  But there is also a 50% chance the heart will strengthen and the patient will live a healthy normal life.   You have a transplant ready.  Do you use it preemptively or do you risk the patient’s life on a coin flip?  I don’t know about you, but if I knew I could perform a surgery that would cure the patient today I would just do it.  Why gamble?  The U.S. government is making the choice to flip the coin.  Maybe we rebound, maybe we don’t.  If the economy doesn’t rebound we will nationalize or reorganize Bank of America, Citi and others down the line and by then the recession will be so deep that it will take years to rebound.

This started as a banking problem and our lack of action has resulted in a full blown global recession.   The longer we wait to deal with the problem banks the greater the risk of more problems down the line.

It’s still early.  We can remove the bad organs from the system.  But there doesn’t appear to be anyone willing to pick up a scalpel and begin cutting.

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