With Its Failed Policies, Government Triggers “A Return of Systematic Risk to Credit Markets”

Paulson, Bernanke and the other clowns in charge of the economy are causing “a return of systematic risk to credit markets”.

As Bloomberg writes:

Treasury Secretary Henry Paulson’s decision to abandon the purchase of toxic mortgage-linked securities under the Troubled Asset Relief Program may trigger a return of systemic risk to credit markets, BNP Paribas SA said.

“Substantial risk still remains within the U.S. financial system,” said Rajeev Shah, a London-based credit strategist at BNP Paribas. “Uncertainty about existing troubled assets could lead to increasing systemic risk.”

Solvency issues could come back into play,” Shah said in an interview. “The TARP has not helped to spur lending.”

As Markit’s Gavan Nolan writes:

The Bush administration’s change of tack on TARP – the funds will no longer be used to buy distressed and illiquid assets from financial firms – has created uncertainty and unnerved markets.

See also this and this.

What’s going on?

Well, the banks and big insurance companies, hedge funds and other titans are saddled with huge quantities of derivatives and other “toxic assets”.

People apparently weren’t aware that Paulson dropped the plan to buy toxic assets even before the bailout legislation was passed. Now that people realize that the CDOs, CDS and other toxic instruments won’t be sponged up by the Feds (except perhaps in the case of AIG), they realize that we are still at systematic risk. We always have been. But many people were apparently happily asleep and dreaming that the government was doing something constructive to fix it.

It is not really a return of systematic risk. Rather – by refusing to take the bull by the horns to reign in credit derivatives and other toxic instruments – the government has ensured that the systematic risk was never solved. Instead of letting insolvent financial institutions which made wildly stupid and greedy bets fail – which is the necessary medicine – the Fed is propping up corrupt losers and encouraging them to be more corrupt and make worse investments in the future. Instead of letting the deleveraging fires burn out on their own with the minimum amount of damage possible, the government is trying to reverse the process, which will just fan the flames and make it more dangerous.

By spending trillions of dollars on fruitless efforts, Paulson and Bernanke have let the real economy decay for months, and put the credit rating (and solvency) of the country at risk by exponentially increasing our debt.

Moreover, by spending all of that money, we have less to actually help out struggling taxpayers and to stimulate the economy. Economist Robert Reich says: that we are already in a “Mini Depression”, and that the bailouts wont do anything to stimulate demand, the one thing which can turn the economy around. Former Assistant Secretary of the Treasury, and former editor of the Wall Street Journal editor, Paul Craig Roberts writes:

“The bailout funds have been wasted. The expensive bailout does not address the problem of falling employment and rising mortgage defaults. Treasury Secretary Hank Paulson could not see beyond saving Goldman Sachs and his bankster friends. The Paulson bailout does nothing except take troubled assets off banks’ books and put them on the overburdened taxpayers’ books, thus endangering the US Treasury’s credit rating.”

Paulson, Bernanke and the rest of the clowns are putting our entire economy at risk with their poor policies.

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