Bill Fleckenstein

Contrarian Chronicles11/17/2008 12:01 AM ET

Trillions down and still bailing

A hodgepodge collection of efforts has put us all on the hook for piles of money, and what do we have to show for it? A still-terrible market and a recession.

By Bill Fleckenstein

Unfortunately, despite some 12 financing facilities created by the Treasury and the Fed, massive interest rate cuts and various bailouts, the government has little to show for its attempts to dictate where markets should trade.

The Fed's own balance sheet has exploded from roughly $900 billion worth of debt in August to around $2 trillion as of last week. Knowledgeable sources expect that to reach $3 trillion by the end of the year.

That means that it will have grown from approximately 6% of gross domestic product to more than 20% in the space of four months. (For perspective, Japan's balance sheet grew from roughly 9% of GDP to 29% over the 10-year period from 1994 to 2004, as it pursued "quantitative easing," which basically involves the central bank making more cash available to banks to ease lending.)

These numbers and rates of growth are so enormous (and unprecedented) as to be utterly incomprehensible. Does anybody actually think the government has any idea what it's doing?

I think it's certainly dawning on folks that when the government "does something," it often creates more problems than it solves. In this case, as it props up poorly managed companies, it may only be allowing them to rain further havoc on the better ones in their industry. American International Group (AIG, news, msgs) is an example of this, and I'm sure many other financial entities will turn out to be as well. (As an aside, notice all the idiotic executives, across a wide range of industries, who have bought back hundreds of billions of dollars' worth of shares at stupid prices -- a classic example of blowing up their businesses in an attempt to manage the stock price.)

Parched for work in arid times

Though the government hasn't admitted it yet, we are in a recession, and in this particular instance, it seems to me that creating jobs will be an unusually severe problem. That's because the economic expansion we saw from 2002 to 2007 was essentially just a function of speculation (as I have stated often -- and I explain in my book "Greenspan's Bubbles"). I just cannot stop worrying about where the jobs are going to come from prospectively.

When I wrote that book, I pretty much exorcised my own demons regarding my revulsion and anger at the policies of former chief Alan Greenspan and his Federal Reserve. Recently, though, I couldn't help but think how much better off everyone would be had the United States used the time after the equity bubble and the 9/11 attacks to pursue sound policies, as well as encourage folks to save money and prepare themselves for the demographic challenge of Social Security and rising health care costs.

Instead, Greenspan created a multiple-GDP-sized housing bubble, during which folks took on huge amounts of debt instead of actually saving money. It was only ridiculous financing (which has since imploded the banking system) that allowed so many folks to pay absurd prices for houses -- and take money out of them at the same time via home-equity loans.

Of course, one of the most misguided government ideas was trying to prop up home prices. (Secretary Hank Paulson essentially conceded as much last Wednesday when he announced that the Treasury Department was abandoning its plan to purchase troubled mortgage assets.)

House prices need to come down to where folks can afford them. And prices may have to fall even further than we might have thought in the first place, because there's going to be high level unemployment and probably not a lot of wage growth.

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Jim Jubak
Jubak: Fire the whole Treasury team
Don't stop with just Henry Paulson, says Jim Jubak, fire the entire team at the Treasury. They’re incompetent, insensitive and arrogant, he says, and President-elect Barack Obama shouldn't hire any of their clones.

Cut the wires to his microphone

This is going to be a very unpleasant period, I'm sorry to say. The outcome we are witnessing is exactly why, during both the stock mania and the housing mania, I was so vociferous in my criticism of Greenspan. He is the one man who continually meddled with the market and continually advocated that folks behave in an irresponsible way.

I find it outrageous that this buffoon is still making speeches (and commanding huge fees) when the entire country, and perhaps the world, is paying for his crimes against finance.

At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column.

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