Breaking The Fever: Could This Crisis Also Be The Cure?

The first phase of this cure is reduction of debt throughout the financial system. So far, overall losses to financial institutions are $400 billion to $600 billion, and that may well go higher. This requires cutting balance sheets -- assuming banks are levered around 10 to 1 -- of around $4 trillion to $6 trillion in in lending and asset sales.

For example, the bankruptcy of Lehman Bros. meant about $600 billion of debt was eliminated. This inflicted losses on holders of Lehman debt, and that flows through the chain of capital. The destruction of Lehman Bros.' capital (around $20 billion) also permanently diminishes the capacity for further credit creation in the future.

The second phase of the cure is the higher cost and lower availability of credit. This forces corporations to sell assets, reduce investment and raise equity -- for example, as General Electric has done. It also forces consumers to cut debt by reducing consumption or selling assets.

Read the whole story here.

Comments

[BrickSykes]

The Congress has a Magnificent Opportunity to take over the Federal Reserve like no other time since its beginning! Such a move could easily involve military force, but the Federal Reserve (a Private Bank) as well as Freddy Mae and Fanny Mae (both Private Mortgage Companies) need to GO!!!

Every American Citizen has a vested interest in every transaction presently being negotiated in this 'Bailout.' This could be the most important decision Congress could make FOR the American Consumer!

Brick

[timezone]

Credit card companies, mortgage companies, seems like all companies have successfully tempted people to live so beyond their means, that that, and no or little regulation, so CEO's have created their own fantasyland, have created the problem we're in. Prudent seems to have been a BAD word for years, it's time GREED and EXCESS become things to avoid. Everything has to balance out sooner or later, and it's no surprise the economy has come to this. I have to believe that now priorities will become more clear and things will get better.

[tre]

Rather than giving banks a few billion, why not stop giving loans to people with bad credit ratings?

[LemonMeringue]

TAKE AWAY THE BAILOUT

Please call Congress and demand it.

A few brave people told us this was a sham and would not work. The crash is inevitable - with or without an additional $2,300 per taxpayer in national debt from the bailout.

[wordvarc]

$2,300/individual...over $10,000 per taxpayer.

[Paul]

Maybe this means that laws will be written against sending manufacturing jobs overseas.

Maybe laws will be written so that a company that is generating value can't be taken over and looted.

Maybe laws will be written so that illegal immigration is stopped.

Maybe we will elect a Congress that will create a new economy that works for the people instead of for captialists.

Socialism - the way forward.

[LemonMeringue]

That is exactly what Congress could have demanded in their bailout bill!!!!!!!!!!!!!

As Ralph Nader said, Congress had Wall Street over a barrel. They could have asked for anything: regulation, laws, guarantees. Instead they crawled in the barrel and stuffed America in there and let Wall Street roll the barrel off the cliff.

[DuPageDem]

We need an ecomony that exists to serve the needs of the people, not the other way around. The corporate criminal class has run this country for 28 years. Now it's our turn. Start with having the Treasury bill those AIG execs for their spa junket, and locking up those who don't pay.

[LemonMeringue]

Bailout or no bailout, this has to happen.

The bailout is merely additional robbery of the taxpayer - to the tune of $2,300 per individual. Can you afford that?

Call Congress and demand they rescind the bailout. It was a bad bill and obviously it didn't work.

[markusmarkus]

This crisis is the culmination of this government's willingness to borrow and spend. Our country's economy, the world's economy, was in much better shape on 1/20/2001 than it will be on 1/20/2009.

At least on 1/20/2009 we'll have a President who has a clue to get us out of this mess.

Barak Hussein Obama/Joseph Robinette Biden 2008

The rethugs are terrified of the Democratic candidates' middle names! Pass it on.