Euphoria was almost universal yesterday…except on Wall Street.
“Dad, don’t pick on Obama,” said Maria, calling from California. “I watched the inauguration yesterday. It was moving. Really moving. They seem like such nice people…and they really want to do what’s right. At least, that’s the way it seems to me…”
We watched the TV news. The British press focused on the race issue. Blacks interviewed by the BBC spoke of the ‘historic moment’…of the dreams of Martin Luther King finally realized…of a new era of race relations. There were hoorahs and tears…
We were never fond of racism, so we weren’t especially tearful upon reading the obituaries for it. Besides, we’re a little suspicious of the coroner’s report. We’d like to see the toe tag, just to be sure.
Still, everyone wants Obama to succeed. His mother and grandmother, looking down from heaven. His relatives in Kenya. His party. His country. The entire world. Even we hardened cynics here at The Daily Reckoning wish him well.
But we weren’t born yesterday.
And neither was the stock market. The man who got the warmest welcome ever from the press and the public got the rudest brush off from Wall Street. It was the worst sell-off for an Inauguration Day in history. The Dow fell 332 points. Oil traded around $40. The dollar strengthened…to $1.28 per euro.
O! Bama! Where is thy bounce? Perhaps it is already over. From their low in November, to their high a couple weeks ago, stocks worldwide recovered about a quarter of what they had lost. Now, they seem to be going down again.
We don’t know what the stock market sees, but we see a lot more trouble coming.
Houses in Southern California are down 35% from their peak.
Japan says its economy is “worsening rapidly.”
“Air France warns loss is likely” is one headline in Europe this morning; “German retailer to cut as many as 15,000 jobs,” is another.
But the big news is in the banking sector.
U.S. banks are “effectively insolvent,” says Nouriel Roubini. He figures losses in the United States might rise to $3.6 trillion – most of it in banks and broker-dealers. Which leaves the sector a little short. The banking system in the United States only has $1.4 trillion in capital.
Last week, Bank of America posted a quarterly loss of $1.79 billion…the first loss it’s taken in 18 years. Citigroup out-did it, with a loss of $8.29 billion for the last quarter of ’08.
As in Japan in the ’90s, the economic boat cannot right itself until this bilge is dumped overboard. But the feds are against it – fighting the correction with every tool they’ve got.
Obama says his team with be “bold and swift” in its efforts to deal with the problem. But the action they take will be timid and slow. That is, they will try to hold on…to protect what we have…to prevent change at all costs. “Yes we can!” they will say. But they can’t make the mistakes of an entire generation disappear – especially if they try to prevent a correction.
The truly bold and swift solution, on the other hand, would probably get him impeached. It would be to simply announce that the Obama government was letting nature take her course. No more bailouts. No more stimulus packages. No more federal guarantees or ‘refund checks.’
“Keynes is dead,” Obama should say; “the bankers will get what they deserve.”
In a matter of days, the whole banking sector would go bust…along with GM (more about that, below)…and thousands of businesses all over the country. Millions of people would lose their jobs. Stocks would crash down to 3,000 on the Dow…maybe lower. There would be keening by widows, whose husbands had jumped in front of trains or slit their wrists…there would be gnashing of teeth by millions, whose hopes of getting something for nothing were suddenly dashed…there would be mobs in the street and revolution in the air.
A few days later, banks that were still solvent would pick up the pieces of those that had gone bust. And gradually, the economy would pick up…building on a much more solid base.
But don’t trouble yourself about it, dear reader. That won’t happen. Instead, Mr. Obama will take the more cautious route…
Reprinted from Daily Reckoning Blog
