A toe in the water...

No, I would not recommend getting back into the stock market (the reference in the blog post title - dipping a toe in the water meaning getting some small percentage of your cash back into stocks).

I am just posting a brief comment on the current Geithner Plan to save our financial system. Hopefully more posts will follow...

I do not want to give the impression that I think any 'solutions' have worked, nor that any recent proposals will work, since I stopped posting to this blog in November. On the contrary, I think things have played out pretty much as I pessimistically expected - I just haven't had time to blog about it.

People are outraged at the AIG bonuses, the Merrill Lynch bonuses, the corporate jets, the lack of shame on the part of Wall Street, but the amount of money we're talking about with these stories is peanuts compared to the looting of taxpayer monies that has already occurred with AIG payouts (that's billions of dollars, slightly more than the $100s of millions we're demanding payback for) and what the new Geithner Plan entails.

Here's Jamie Galbraith on the Geithner Plan:

If Geithner's plan to fix the banks would also fix the economy, this would be tolerable. But no smart economist we know of thinks that it will.

We think Geithner is suffering from five fundamental misconceptions about what is wrong with the economy. Here they are:

The trouble with the economy is that the banks aren't lending. The reality: The economy is in trouble because American consumers and businesses took on way too much debt and are now collapsing under the weight of it. As consumers retrench, companies that sell to them are retrenching, thus exacerbating the problem. The banks, meanwhile, are lending. They just aren't lending as much as they used to. Also the shadow banking system (securitization markets), which actually provided more funding to the economy than the banks, has collapsed.

The banks aren't lending because their balance sheets are loaded with "bad assets" that the market has temporarily mispriced. The reality: The banks aren't lending (much) because they have decided to stop making loans to people and companies who can't pay them back. And because the banks are scared that future writedowns on their old loans will lead to future losses that will wipe out their equity.

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Click on that link to catch the video clip or read the full transcript.

I've been saying all along that the fundamental problem here is that our economy has been built up over the past couple of decades on a foundation of debt. Economic growth based upon ever greater amounts of leverage over time is unsustainable and trying to get the economy back on track (back to the 90s or even the less attractive early 00s) is a fool's mission. One last quote from Galbraith:

In Geithner's plan, this debt won't disappear. It will just be passed from banks to taxpayers, where it will sit until the government finally admits that a major portion of it will never be paid back.

On the surface, Barack Obama does not appear to be effecting change. Larry Summers, Robert Rubin and Timothy Geithner represent the philosophy and are at the core of the policy decision-making that got this country into the mess that we are in right now. These are the same people that are currently in charge of policy.

I can only hope that this is part of some grand plan of Obama's to eventually do what is necessary to move the economy forward again.