Monday, September 29, 2008

Another Bailout is needed!

I have been harping on the fact that the impending recession is result of excess money. Therefore unless money supply contracts and goes below a certain threshold, we are unlikely to see any recovery. We are now in the first step of capital destruction.

Like I mentioned earlier, in the first step, it is the money system that bears the risk. The regulator has no alternative but to ensure that the system survives. This is where the current bailout package (lets call it bailout 1) is aimed at.

The risks arise in the next step. Here the money system goes into self preservation mode rather than help push the bailout effects down to individuals and small businesses. Here second bailout will be required. But this bailout will need concurrent regulatory changes so that the money system does not simply fatten up – but actually pushes the recovery stimulus down the chain. The size of this stimulus will be at least twice the first bailout.

I think, these two bailouts will have to clean the system. Beyond this will be a period of lull. This is the time individuals and small businesses start reducing their loan outstanding. This is likely to take long time in case of US.

Further to this is the rosy skies and sweet smell of growth and increasing wealth.

Notes:
What is currently called bailout is actually second bailout – the first was tax rebate stimulus of USD 150billion in around Feb- March 2008