The Debts of the Spenders: The Bad Bank Idea

US government officials are now considering a "bad bank" to hold the bad assets of bank balance sheets. UK officials are also reportedly researching similar proposals.

This new credit that world governments are pumping into the banking system can THEORETICALLY offset the deflation in the private sector without triggering inflation...as long as it is contained w/in the banking matrix.

This is accomplished through electronic swaps and transfers between governments and large institutions (corporations, ngos, quasi-govt bodies, etc.). In the past, bodies like the Resolution Trust Corporation, or RTC were established to handle credit failures. But now the problem is complicated by the existence of derivatives whose notional value FAR outstrips any real
economic value by orders of staggering magnitude:

40x-50x the ENTIRE GDP of the world by common measures.

We can enter a discussion about the different kinds of derivative packaged instruments - CDOs, CDS, CMBS, etc. - and how much value is retained within these "assets" (and I use that label very loosely). But the talking points will always return to the focal point of marketability - if private buyers are unwilling to buy then just how much value is really there? I don't have a specific answer because the books have been sealed by the Treasury and authorities by judicial order.

These derivative pools are a ponzi scheme where the banks relied upon new borrowers to pay interest to existing holders. The banks even had mathematicians who ran complex equations to manage the money pools and decided who gets what payment. Once the last sucker was in, there is no more new money to payout the previous investors their interest.

Madoff, the hedge fund con artist, is a minor blip on the radar screen compared to the utter levels of fraud being concealed by the authorities.

Governments can backstop existing debt obligations ...but can central banks print more money than has ever existed in the world?

Remember, the modern financial system is built on trust in the government, trust in social order, and trust in debt.

And what happens when there is a need for REAL currency to circulate throughout the economy? Case in point - America's auto bailout which I have discussed previously. Workers, sub-contractors, suppliers, small businesses, and other economic actors that had NOTHING to do with Wall Street gamblers are going to have to take money out of the system eventually.

The results will not be pretty.