September 22, 2008 - In the last letter I commented on the bailout of Fannie Mae and Freddie Mac. My observation was: "This latest bailout of course begs the question, who will bailout the federal government?"
That question has become even more important as the federal government has added new bailouts since then. The price tag to the American taxpayer is growing by leaps and bounds. Here is Alan Abelson's tally in today's Barron's: "$29 billion for Bear Stearns, somewhere between $1 billion and $100 billion each for Fannie and Freddie (a nice narrow range), $85 billion for AIG, a couple of hundred billion to keep stray banks, brokers and their errant kin from asphyxiating themselves by swallowing toxic paper. And then there's the proposed reincarnation of the Resolution Trust Corp., which all by itself may mean shelling out $800 billion, perhaps even as much as $1 trillion. While we're at it, we might as well include the $400 billion with which the Paulson-Bernanke grand plan envisages endowing the Federal Deposit Insurance Corp. so it can insure money-market funds."
So roughly speaking, we are at $1.4 trillion and counting. The feds haven't even started reckoning how much the banks will lose on their huge derivative exposure.
Also, if you believe the government's statistics, the economy is not yet in a recession, and history shows us that it is towards the end of a recession when banks start taking their biggest losses.
No doubt about it. The losses are building, and the bailouts are mounting. These facts are not lost on everyone outside of the United States who holds dollars, and they are also understood by a growing number of people in the United States. Consequently, look for the dollar to plummet anew.
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