You make some good points. The Lehman Settlement was a huge boost. Behind that, global commitment to shore up future bankruptcies. The biggest threat in all this was derivative exposure on CDO's (mortgages) and Corporate Debt (CDS). Lehman proved derivative sellers continually hedged their exposure as their positions fell in value (Presumably). While Lehman was allowed to fail, the Government basically said they won't let anymore banks go under. That should stabilize the derivative sell-off - and ensuing hedging by CDS/CDO writers - to contain or stop their losses. This is all theory though. I haven't seen the actual numbers on exposure and don't follow CDS spreads, so who knows. But "in theory", assuming Governments hold true to their word and funnel money to every bank that needs it, we should see the end of bank panics and a slow return of interbank liquidity. Whether the Market bottoms here or not, is still up in air. What that means for the Global Economy as everyone inflates and hands out blank checks - not good. Even though CDS sellers on Lehman hedged their exposure as those positions tanked, nobody knows, to date, what their *Total Losses* were. The head of the derivatives adjudicating body said the last settlement only saw a 2% loss. But it was for ThAT DAY. Not the total accumulated losses that had been accrued over the lifetime those contracts were outstanding. What I want to know is - what was the total % loss to CDS sellers on Lehmans CDS insured debt. If we know that, we can get a feel for worst case scenarios in terms of future writedowns. Even if nobody else goes bankrupt, it could serve as a proxy to estimate losses on hedged CDS debt. That way, we can better know whats in store for those companies, and in turn, the overall economy. Even once all this derivative stuff is nationalized or paid off from the FED, its still going to hurt the consumer through currency debasement. Nationalizing losses only retards future economic growth. I keep pointing to Japan, but thats the Model we followed. Nationalize trillions in losses. And they lost 10+ years of economic growth and their Market TANKED 75% the entire time. Even with low rates and Government shoring up. Its possible the DOW could still drop another 40% from here over the course of the next 3 years. The overall Recession has only begun.
So far no real solutions have come forth from the potential providers. If you draw a graphic of the problem (restarting the global economies), you will see it will take a "pulling" instead of a "pushing" to get the satisfaction which is always a requirement. The economincs of debt only work when "pulling" is in the picture. When that went away, in late JUNE 2006, the tipping point was reached to slow and stop the debt market. To get the economies to restart and grow permanently a "new" "pull" has to be put in place. Fortunately, this required and somewhat obvious requirement and its inevitable "source(s)" will serve to change the ass end of the industry forever and the "securitization "experiment" will, at last, fade into the dust. In any string of boxes depicting economics there is always one box that has an advantage facing both directions. Most boxes are "buyer" or "seller" advantaged. There is always one in the string that is both and there is never a "neither". Using "infrastructure" to "pull" has appeared as a surrogate for the real answers. Fixing infrastrucure "pulls" capital down into the local communities where the infrastructure isused (Has utility). It is too bad Samuelson and Bernanke could not hear the rare and insitful Q's from the younger Congressmen far down the lists of seniority. What would have happened if the Powers that be could have seen the opportunity from the viewpoint of making the economy work instead of their very persistent view of "fixing" where they had "experience". Imagine all the paper providers being "pulled" to provide paper. The guy needing the paper just needs a servant to come to the bank with him. A government servant. The servant enters the bank with the person wanting credit. As a third party he leans forward to the bottom line and along with the creditor gives a guarantee that the guy needing the paper will pay it back. The bank then picks up the signed documents and sellls them to the money people who now have a servant (government guarantee) going up stream to where Libor is at play. Libor will not be much of a spread at that point in time. The gov guarantee will pull money down to the local banks. Does anyone remember what "pulled" the money down to locals before late JUNE 2006? It was rising home values backing the mortgage paper. Now we need the government guaranteeing the local businesses that provide jobs and grow the economy. Samuelson and Bernanke aresecond stringers who just don't get it. they started with a 2 1/2 pager that was for the "home town" NYC team whose quants invented what screwed it all up. What makes economics work is people on Main Street working directly, indirectly, by inducement and substitution. Businesses small average ad large need federal guarantors of the paper they use to run day to day. If a company has been getting the job done it needs to pay workes like before big finance screwed things up. The feds need to sign right along side the administrators who hire the workers so the workers get pay checks and spend their pay checks on mainstreet. Doing reverse auctions so cash obtained can be used to do stock by backs to run up stock values is the last hand out the feds need to be doing. The fed needs to guarantee jobs by guarnateeeing paper that keep employees on the job and spending their pay checks to gettthings rolling. The fed needs to "push" the local banks back into business by guaranteeing the paper small, medium and larger businesses need to do their usual operations. If the fed is too lazy to come to the bank with all the business men, then set up a small temp hut outside the bank and let the businessman step inside and pick up a guarantee before he goes inside the local bank where he has done business for umpteen years. Samuelson and Bernanke need to get the fact that they are public servants straight by sitting in huts for a week or two and giving guarantees for paper to good and strong community business men , the backbone of America.
Pushing up stock values permits companies to raise equity funding to perform exactly the sort of business and infrastructure renewal that you talk about. Seriously, oil stocks trading at 4X earnings? That just implies that the oil industry is going to go out of business. The common person will not invest in oil shares until the P/E is in the 20s or 30s, and predictions of long-term profitability rank right up there with over-hyped firms such as GOOG.