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A Better Bailout


Is the nationalization of Irish banks the solution for what ails the US?


Earlier today, the Irish government attempted to stave off financial crisis by guaranteeing all deposits and certain debts in 6 Irish banks. The full government statement can be found here.

The move comes 2 weeks after a US-style FDIC deposit protection limit of €100,000 was introduced and follows Monday's record losses for Irish financial stocks.

The plan, which guarantees an estimated €400 billion ($567 billion) of liabilities, covers retail, commercial and inter-bank deposits as well as covered bonds, senior debt and dated subordinated debt.

This proposal has been offered by some as a potential alternative to the Paulson Bailout Bill, now stalled in Washington D.C. Below, several Minyanville professors take a look at the Irish bank guarantee and consider whether something similar should take place in the U.S. to stem the financial crisis here.

Mr. Practical: Just Protect the Deposits.
The Irish have shown their peers on the continent how to do it, and one shouldn't be surprised if many others follow. It's good to see someone showing strong leadership, though we must watch Irish sovereign Credit Default Swaps today just in case.

Minyanville's Why Wall Street Will Never Be the SameProfessor Kevin Depew: A Wolf In Sheep's Clothing
I've looked at this proposal all morning to try to understand why some think it's even slightly more helpful than the Paulson Bailout Bill, which itself is simply a disaster waiting to happen. From my perspective, I simply cannot see it.

First, let us be clear: The Irish government has nationalized that country's banking system. Any government backstop on the deposit base is nationalization, pure and simple.

Evaluating the economics of this plan, we can see how it is impossible to add 2 and 2 and arrive at a similarly workable nationalization effort here, even if such a massive nationalization attempt was desirable.

The Irish government is banking, literally, on guaranteeing 10 times their national debt and twice their economic output with this. The numbers for a similar plan here are simply astronomical. Ireland's GDP as of 2007 was about $186 billion USD, which puts their economy at roughly the size of Alabama's.

But let's assume the impossible for a moment - that this plan is workable here from an economic standpoint. The main problem is that guaranteeing deposits does not kickstart credit demand, and may not even kickstart supply, which is the real issue for the US.

No matter what deposit guarantees are put in place, the primary issue that must be accepted is that underlying collateral is declining in value - NOT because there is not enough available credit to purchase it, but because there is too much supply of it and it has been overleveraged.

Finally, and most importantly, there's the notion that guaranteeing deposits protects the saver. It most assuredly does not. A government guarantee of deposits is a con game where the depositors are reassured that their savings are safe, while the very act of guaranteeing the deposits destroys the underlying value of that which is being guaranteed.

The hard truth is that this just another wolf in sheep's clothing, a way to continue the massive transfer of wealth from those who are risk-averse to those who behave (and have long been rewarded for behaving) as if all risk is meaningless.

There are 2 realities that this country must face, and face right now. One, the size, interconnectedness and scope of the financial system puts it beyond fiscal and monetary control. Two, this debt deflation is global, secular and psychological... and unstoppable. It must be allowed to run its course.

I understand the attempts at intervention. Really, I do. But the fights over which Bailout Bill to go with and how to intervene should be seen for what they really are: In the grand scheme, simply squabbles over who gets to keep the most out of what's left over from the inevitable deflationary debt unwind. Judged through the lens of history, Lehman Brothers and Bear Stearns will be seen as arbitrary victims of these minor squabbles.

For those living in the real world on Main Street, there's a simple and clear prescription for how to manage through this deflationary debt unwind.

First, do not be fooled by political and monetary gibberish about what proposal will save us next. Instead: Get out of debt. Protect your assets. Determine the safest institutions to protect your savings. Continue to live as you always have, while keeping in mind that the people who are now entrusted with "rescuing America's economy" are the very same people who brought us to this breaking point in the economy... even as they either failed to see it coming, or, if they did see it coming, denied its existence in order to take out of it the most they could before the inevitable collapse.

At some point, a reasonable person will be forced to question either the intelligence of these people, or their committment to serving the American people.

This morning on national television, President Bush pleaded for the passage of the Bailout Bill while noting, ominously, that yesterday the stock market lost $1 trillion in value. That number is supposed to move the American people, who remain defiantly against a bailout, by stoking their fear of loss.

The question, then, after all the dire warnings, is why don't Americans care about the consequences of No Bailout? The answer is very simple: Because the vast majority of Americans have already been living with those conditions for more than 5 years now.

I call it a Stealth Depresion because it's been running so far below the radar of economic elites and the mainstream media, who prefer to report on happier things. Now that it's becoming less stealthy, there's suddenly a crisis.

Remember: Get out of debt. Protect your assets. Determine the safest institutions to protect your savings. Continue to live as you always have.

No positions in stocks mentioned.

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