Financial China Syndrome By: Mark W Adams

We face a Wall Street "meltdown," if we don't give Hank Paulson a Trillion Dollar blank check, right? It occurs that the term is borrowed from what can happen if a nuclear power plant loses coolant. (That's noo-kew-ler to those of you from Wassilla).

The core would melt through the containment facility and keep going through the ground with nothing to stop it -- right through the center of the earth all the way to China, hence the "China Syndrome." Realistically, the core would stop as soon as it hit the water table, with the unfortunate side-effect of blasting radioactive steam into the atmosphere. (If you're too young to have seen the movie, I highly recommend it.)

The consensus that we are avoiding a catastrophic Great Depression 2.0 is something everyone who matters seems to take on faith, and by spending a Trillion Dollars we are avoiding a $30 Trillion hit on our economy -- a bargain.

I've kinda figured that the next industries to close down if this bailout didn't happen would be the big auto makers, followed closely by the perpetually shaky airline industry. With most of the residents of lower Manhattan on the streets, Detroit turning into a ghost town and Washington having almost no choice but to nationalize the airlines since it would no longer be profitable to run them privately, you can see how quickly commerce would shut down across the nation.

The 25% unemployment of the 1930's might be overshadowed in a matter of months; and in sheer numbers, the army of people on the streets is unfathomable and would certainly be larger than the original Depression.

So I'm buying it, a bit. Of course, there's nothing that says the Fed couldn't have propped up the auto and airline sectors even if the financials were allowed to drown, right? Probably cheaper too, no? Maybe, and frankly I don't have enough data to even hazard a guess -- so I'm just talking through my hat on this, but it feels right.

However, if the financials went down, we probably would be unable to bailout other sectors even if we wanted to do this on an ad hoc basis -- Secretary Paulson's preferred approach right up until the last time we heard the words "The fundamentals of this economy are strong" come out of John McCain's mouth before he reverted to an Orwellian game of redefining the meaning of the word "fundamentals."

The financial problem tracks the radioactive nature of nature itself inside a nuclear reactor when the coolant system breaks down and stops regulating the reaction. It's not a bad metaphor to describe Washington's failure to pour some water on the out of control investment houses leveraging themselves beyond reason on risky and ridiculously complicated mortgage-backed security instruments. And again, although not that many folks have been talking about it, China comes into play here too -- and not just in a metaphorical way.

In USNews, James Pethokoukis mentions in passing the China Syndrome looms large over this whole affair as he tries to get a handle of what we're trying to avoid.

Now this is all a very rough guesstimate and doesn't include the costs of all sorts of other ramifications. Here is a fun one: the dissolution of China. Its economy is built for hypergrowth. A dramatically rising standard of living is both keeping the Communist Party in power and keeping the country together. Neither might survive a global economic meltdown. What is the economic impact of that? I don't know. My guesstimator just blew up.

I think I can flesh this out a bit. The two biggest foreign holders of U.S. public debt, in other words the countries or their central banks that make it possible for us to run this country at a perpetual deficit, are Japan and China at $593 and $518 Billion respectively. This represents nearly half of our total foreign held debt, which in turn is about 44% of the total debt. If you've been following along, most of this debt is held in the form of Treasury Bonds which can (in theory) simply be redeemed on demand.

The official explanation why we need to act swiftly on Wall Street is to avoid a credit crunch, where people and businesses needing credit or access to their pre-existing revolving accounts are shut out. That's bad enough, but what happens when the central bank of China can't issue credit to it's companies because of a world-wide squeeze. Evidently, according to Secretary Paulson, the financial world is much like the Internetz, a "series of tubez" that has gotten clogged by the Big Shitpile.

The Trillion Bucks we're literally flushing down those tubez is supposed to clear out the derivative default credit swaps (crack) that the Wall Street financiers have been smoking through those pipes for the last decade. No one has mentioned it, but if China (and/or Japan, but their credit situation shouldn't be as vulnerable) can't work in the normal world of free-flowing credit, they will have no choice but to start cashing in all those T-Bills. That alone would be serious enough, but it would undoubtedly cause a run on the Treasury as the world divests itself of dollars, crashing our currency to the point that a loaf of bread might cost you a hundred bucks, or more, within a month.

That pretty much the end of the world as we know it. That's why you're seeing such dramatic moves, serious tones and ghostly white complexions on the faces of the folks who know what's really happening and know they must do something extraordinary soon. (Also keep in mind that massive global unrest caused by unemployment and hyperinflation was a prerequisite for WWII.)

So no, anyone who is saying, "Hell No" to the bailout or who wants to take their chances with a recession/depression, you obviously have zero idea of just how bad things really could get if we just allow the planet's capital markets to dissolve -- no matter how much those bastards deserve to lose everything for bringing us to this point.

That said, the markets realize that Washington has woke up and will do something -- which has slowed the meltdown for now. Still a crisis, sure. But that's different from an emergency requiring unprecedented plenary powers with a credit card balance the size of the GDP of India and no judicial, administrative or congressional oversight. We've got time to do this right. Not a lot of time, but if by Wednesday the headlines are screeching that the deal is bogged down, chalk it up to partisanship and the tired GOP scaremongering we've seen again and again as the administration bullies Congress into yet another bad decision.

Frankly, exorbitant CEO pay is a drop in the bucket in all this, even as it becomes a lightning rod issue. Much more important is allowing bankruptcy judges the power to restructure real estate mortgages much like they do with other credit instruments. That move alone will do the most to stabilize the market, keeping more people in their houses and businesses, preventing the scourge of vacancies that are turning residential neighborhoods into ghettos and closing down small businesses (the backbone of our economy) as the surrounding properties lose value in a never ending spiral.

That leaves me with two things to look forward to, John McCain coming out against doing a bailout at all, just to shore up that Maverick myth of his -- again proving his sheer ignorance of all things economic; or trying to score cheap debate points Friday if there's no bill on the PrezNitWit's desk because Congress decides it's foolish to set Paulson up as King Henry XXVII and wants to address the real economy -- the slump in housing prices that will continue to destroy confidence and add to our troubles if left to fester.

Go ahead John, make my day. Idiot. Please go into your hot-headed desperation mode for all to see.