Market Update: 2009-02-17

Now, right on cue, we find ourselves testing of the stock market’s November 2008 lows.

As I mentioned in last week’s Market Update “The Danger of America’s Free Market Infatuation”, I don’t believe that anything less than the full-fledged, FDIC-initiated nationalization of America’s largest insolvent banks, such as Bank of America and Citigroup, will stop America from falling into the abyss. I specifically said in that posting that “If we don't underpin our financial sector with the full faith and credit of the United States government, America really does risk reliving the 1930s.”

Mr. Obama has had one month to skirt around the banking issue, and it is the free market that apparently doesn’t like his administration’s resistance to bank nationalization (check out the new low on the BKX banking index today). The bank stocks are in freefall now because the free market knows that the banks are worthless and the government is going to resist nationalization as long as it can.

With a little more time, maybe more Americans will warm up to the idea of using bank nationalization as a means to attempt to save our capitalist system rather than insisting that nationalization is wrong while we watch our economy go to hell in a hand basket. This past Sunday even U.S. Senator Lindsay Graham (R-SC) admitted that nationalization may be the solution. On ABC’s This Week (2/15/2009), he said Senator Graham said, "This idea of nationalizing banks is not comfortable…But I think we've got so many toxic assets spread throughout the banking and financial community, throughout the world, that we're going to have to do something that no one ever envisioned a year ago, no one likes. To me, banking and housing are the root cause of this problem. I'm very much afraid any program to salvage the banks is going to require the government... I would not take off [the table] the idea of nationalizing the banks."

In my opinion, the Obama administration may only have several weeks to several months left to do what is right. If they continue to skirt around the issue, and continue to inject taxpayer dollars into insolvent banks just so that the banks’ shareholders and top managers can benefit financially while the country’s financial system bursts apart at the seams, then that is wrong and will never work! The American taxpayer should not have to take on all the risks just to allow the banks to remain independent and be profitable again. That is beyond not fair, it’s just plain wrong!

America, and the world for that matter, is now teetering on the edge of a financial depression. In my opinion, the only chance we have to salvage our economy, our way of life, and our national security (both externally and internally, i.e. to prevent widespread panic and social unrest), is for America’s government to throw its full weight behind our banking system. Anything less than the full faith and credit of the United States will not work.

Even nationalization of the big insolvent banks won’t magically fix things and make it all better. But at least it could make the next few decades a little easier to endure. The United States has an unprecedented debt bubble and that debt bubble is going to collapse. It will likely take 20 years or more for the massive amount of debt to fully unwind. The unwinding will be difficult for us all, but it has to happen. But how it happens, and whether or not the government is willing to soften the blow, is the decision Mr. Obama and all Americans have to make now.

Nationalization is not communist, but rather it is patriotic. As an American, I want America to succeed and for our capitalist system to live on. I think that the FDIC takeover of insolvent banks is necessary to save America’s capitalist system. Remember, capitalism must have capital to work; right now our banks don’t have any capital! America cannot sustain its capitalist system without a trusted and capitalized financial system.
America’s banks have failed us. Their greed and imprudence helped to create the problems we face. And now no one in America, or the world for that matter, has faith in our banks because of their track record of gross mismanagement and countless stupid decisions along the way. If we just sit back and continue to watch the banks falter, then our economy and stock market will most likely continue to fall. (For more insight on what failure to act now could mean for your portfolio, please read my January 20, 2009 Market Update “The Black Swan of 2009.”)

If, and most likely when, we nationalize the insolvent banks, I hope that our economy will be able to stabilize. After a period of time (say 20 years) the debt bubble will work itself out. Once America’s economy and our balance sheet are back to a more normal level, it will be in our interest for the government to sell the banks back to the private sector. By then, hopefully our banking system will once again be strong enough that it will be worth a good chuck of change and the government will be able to use the spinoff IPO proceeds to help pay down some of our federal debt. And hopefully next time around, when the banking sector has rejoined the free market, our government will do a better job of regulating the banks and ensuring that we don’t find ourselves in another mess decades later.

Nationalize now, or forever hold your peace.  We will no more later.  Until then, Happy Investing!

Gregory Guest