Is the credit crisis a race to the bottom?
It seems like we’re hearing about failed banks and institutions on a daily basis now. Hitting that point of no return, insolvency, seems to do the trick. At the same time, bank-to-bank lending rates (Libor rates) have been spiking, and that means that banks are relucant to give out cash. This is despite the massive injections of liquidity that the Treasury has been making.
To this casual observer, it would seem that the game is to hoard as much cash as you can, to try and survive longer than your competitors, and also buy out as many competitors as you can on the way down. Also, try to predict the end of the game so you can time your acquisitions well, and also know how much cash to hoard. If that’s the case, then injecting liquidity is just giving the players more time on the clock, it’s not restoring confidence or any such rubbish.
And if the game doesn’t end, and all banks are ultimately insolvent regardless of however much time they get on the clock? I think that’s what the bailout plan is trying to avoid; by providing an end to the game, they hope to stop the cash hoarding and return to normalcy. However, I haven’t heard any indications that the $700 billion is any more than a guess. It’s scary to think that the network of complex financial securities (“innovations”, as they like to call them) may ultimately be more in the value of trillions than billions. There may be no way to bail out these banks at all.
If so, is it worth it to even try? My guess is that it’s worth it to try, but if so, it’s important to either go the Buffett strategy of getting a real market price (instead of a make-believe hold-to-maturity price), or to go the Swedish route that involves buying the companies directly. Even a solution that attempts to stem the tide of foreclosures is woefully inadequate to deal with the majority of Americans in financial distress for whom a mortgage is only one aspect of their difficulties. There’s also massive amounts of credit card debt, car loans, etc. that won’t disappear through renegotiations of monthly house payments.
Sorry for the doom & gloom, but I’m hoping someone can step in and tell me why i’m wrong, because this is the best understanding I can come up with so far.
