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Title: Additional Thoughts on the Bailout
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URL Source: http://www.informationclearinghouse.info/article21034.htm
Published: Oct 17, 2008
Author: Paul Craig Roberts
Post Date: 2008-10-17 12:24:51 by richard9151
Keywords: None
Views: 207
Comments: 11
Additional Thoughts on the Bailout "We hang the petty thieves and appoint the great ones to public office" - Aesop By Paul Craig Roberts October 16, 2008 "Information Clearinghouse" -- Just as the Bush regime’s wars have been used to pour billions of dollars into the pockets of its military-security donor base, the Paulson bailout looks like a Bush regime scheme to incur $700 billion in new public debt in order to transfer the money into the coffers of its financial donor base. The US taxpayers will be left with the interest payments in perpetuity (or inflation if the Fed monetizes the debt), and the number of Wall Street billionaires will grow. As for the US and European governments’ purchases of bank shares, that is just a cover for funneling public money into private hands. The explanations that have been given for the crisis and its bailout are opaque. The US Treasury estimates that as few as 7% of the mortgages are bad. Why then do the US, UK, Germany, and France need to pour more than $2.1 trillion of public money into private financial institutions? If, as the government tells us, the crisis stems from subprime mortgage defaults reducing the interest payments to the holders of mortgage backed securities, thus driving down their values and threatening the solvency of the institutions that hold them, why isn’t the bailout money used to address the problem at its source? If the bailout money was used to refinance troubled mortgages and to pay off foreclosed mortgages, the mortgage backed securities would be made whole, and it would be unnecessary to pour huge sums of public money into banks. Instead, the bailout money is being used to inject capital into financial institutions and to purchase from them troubled financial instruments. It is a strange solution that does not address the problem. As the US economy sinks deeper into recession, the mortgage defaults will rise. Thus, the problem will intensify, necessitating the purchase of yet more troubled instruments. If credit card debt has also been securitized and sold as investments, as the economy worsens defaults on credit card debt will be a replay of the mortgage defaults. How much debt can the Treasury bail out before its own credit rating sinks? The contribution of credit default swaps to the financial crisis has not been made clear. These swaps are bets that a designated financial instrument will fail. In exchange for “premium” payments, the seller of a swap protects the buyer of the swap from default by, for example, a company’s bond that the swap buyer might not even own. If these swaps are also securitized and sold as investments, more nebulous assets appear on balance sheets. Normally, if you and I make a bet, and I welsh on the bet, it doesn’t threaten your solvency. If we place bets with a bookie and the odds go against the bookie, the bookie will fail, as apparently happened to AIG, necessitating an $85 billion bailout of the insurance company, and to Bear Stearns resulting in the demise of the investment bank. Credit default swaps are a form of unregulated insurance. One danger of the swaps is that they allow speculators to purchase protection against a company defaulting on its bonds, without the speculators having to own the company’s bonds. Speculators can then short the company’s stock, driving down its price and raising questions about the viability of the company’s bonds. This raises the value of the speculators’ swaps which can be sold to holders of the company’s bonds. By ruining a company’s prospects, the speculators make money. Another danger is that swaps encourage investors to purchase riskier, higher-yielding instruments in the belief that the instruments are insured, but the sellers of swaps have not reserved against them. Double-counting of assets is also possible if a bank purchases a company’s bonds, for example, then purchases credit default swaps on the bonds, and lists both as assets on its balance sheet. The $85 billion Treasury bailout of AIG is small compared to the $700 billion for the banks, and the emphasis has been on banks, not insurance companies. According to news reports, the sums associated with credit default swaps are far larger than the subprime mortgage derivatives. Have the swaps yet to become major players in the crisis? The behavior of the stock market does not necessarily tell us anything about the bailout. The financial crisis disrupted lending and thus comprised a threat to non-financial firms. This threat would reflect in the stock market. However, the stock market is also predicting a recession and declining earnings. Thus, people sell stocks hoping to get out before share prices adjust to the new lower earnings. The bailout package is a result of panic and threats, not of analysis and understanding. Neither Congress nor the public knows the full story. If the problem is the mortgages, why does the bailout leave the mortgages unaddressed and focus instead on pouring vast amount of public money into private financial institutions? The purpose of regulation is to restrain greed and to prevent leveraged speculation from threatening the wider society. Congress needs to restore financial regulation, not reward those who caused the crisis. I have talked about what is really wrong endlessly; the total debt burden overhanging America is larger than can be carried by the US taxpayer. This is not about a subprime meltdown; this is about TO MUCH DEBT! Until people begin to understand this, and deal with it personally, everyone will be at risk.
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#1. To: richard9151 (#0)
(Edited)
Well outside of having no debt or living off the grid in a subsistence mode are there any real world suggestions to be made? This is to the readers at large.
"Satan / Cheney in "08" There are no suggestions, Tom, because there are no solutions. I posted a video some days ago with the former budget comptroller of the US government, and as he stated, there is about a 50 TRILLION dollar mess in Washington, DC, JUST AS PERTAINS TO THE GOVERNMENT. Of that, the 'government' admits to about 10 trillion; the rest is 'off-the- books' hidden spending, or, unfunded, and, Tom, that is just the federal government. Add to that all of the debt of the US taxpayers, state, county and local governments, and business, and the problems goes way up over 100 TRILLION dollars of debt. Say that slowly, Tom; 100 TRILLION DOLLARS OF DEBT. Once that sinks in, you begin to see what I have been talking about over the last year, and why I have been saying, there ain't no solution. This hummer is just now beginning to implode, and implode it will; nothing can stop it. Perhaps now you can begin to see that there are no real world suggestions to be made, other than to get out of the cities. Course, it is a bit late for that now.
When a man who is honestly mistaken hears the truth, he will either quit being mistaken or cease to be honest.
As Richard points out, not really. Here is a radical 1837 idea to "re-establish the currency of the Constitution for the Federal Government." http://lcweb2.loc.gov/ll/llcg/004/0000/00490037.gif Congressional Globe, 4. BILL to re-establish the currency of the Constitution for the Federal Government. Be it enacted by the Senate and House of Representatives of the United Slates of America in Congress assembled, That bank notes and paper currency of every description shall cease to be received, or offered in payment, on account of the United States, or of the Post Office, or in fees in the courts, of the United States, as follows: of less denomination than twenty dollars, none after the third day of March, eighteen hundred and thirty-seven; of less denomination than fifty dollars, none after the third day of March, eighteen hundred and thirty-eight; of less denomination than one hundred dollars, none after the third day of March, eighteen hundred and thirty-nine; of less denomination than five hundred dollars, none after the third day of March, eighteen hundred and forty; of less denomination than one thousand dollars, none after the third day of March, eighteen hundred and forty-one; and none of any denomination from and after the third day of March, eighteen hundred and forty-two. Sec. 2. And be it further enacted, That any person holding an appointment under the laws of the United States, and any bank employed to keep public moneys, which person or bank shall neglect, evade, violate, contravene, or in any way elude, or attempt to elude, the provisions of this act, shall be guilty of an offence against the laws; and the person so offending shall be liable to be dismissed from the service, and the bank so offending shall, on satisfactory information, be disfcontinued as a depository of public moneys. Mr. BENTON then spoke at length in favor of the bill authorizing the issue of Treasury notes.
That is right. There is no way out of this. 100 trillion is probably too low of a number. Housing was just the trigger to the entire scheme. The entire amount of paper debt floating around when everything is included might be near 1 quadrillion, or 1,000 trillion. That's why I don't care how much temporary paper is thrown at this by the central banks, they will never stop the contraction. That's what the hyperinflationists here don't understand. If the answer really was just to print and dump, they would just do it, but that isn't how the system works. Why the obsession with more and more credit and lending if the FED could just print and dump? If the banks don't lend and ever expand the credit and debt base, the system fails. PERIOD.
Mark If America is destroyed, it may be by Americans who salute the flag, sing the national anthem, march in patriotic parades, cheer Fourth of July speakers - normally good Americans who fail to comprehend what is required to keep our country strong and free - Americans who have been lulled into a false security (April 1968).---Ezra Taft Benson, US Secretary of Agriculture 1953-1961 under Eisenhower
I admit to being conservative in my numbers; the 100 trillion is hard enough for most to swallow, much less the 1,000 trillion. Most have no clue as to the games that have been going on. Why the obsession with more and more credit and lending if the FED could just print and dump? Exactly, but no matter how much talking is done, no one really grasps, it seems, how the system really works. If people would just think about it; 1,000 trillion in debt (or 100 trillion -- what's the diff?); how much more hyper- inflation is needed!?
When a man who is honestly mistaken hears the truth, he will either quit being mistaken or cease to be honest.
Heh, and people made fun of me because I didn't buy into the deflation argument. This is not deflation: Nor is this: They will be printing and they will continue to print. Printing means inflation. Falling prices are not deflation. Deflation is a decrease in the money supply which doesn't seem to be falling. Now, if you take a look at what the Government is doing, they are doing everything that Herbert Hoover did in the runup to the Great Depression, only this time, it will be an inflationary depression as opposed to a deflationary one. Watch out for a devaluation of the US Dollar. That's about the only thing that hasn't been tried yet. The public works programs are already announced by Pelosi and they are on-track for a record One Trillion Dollar deficit next year. If you'll note; the Federal Reserve is buying commercial paper now itself. It won't be too long before we have a "branch office" of the Fed on every street corner issuing credit cards.
"A leader, for a change." - Jimmy Carter, 1976 campaign slogan. Sound familiar? Here it comes again!
At #3 above it was noted that "Mr. BENTON then spoke at length in favor of the bill authorizing the issue of Treasury notes," in 1837. His speech is in an appendix and an excerpt may provide an interesting view from nearly two centuries ago. The Congressional Globe was the Congressional Record of its time. - - - - - - - - - - Sept. 18, 1837 SPEECH OF MR. BENTON, OF MISSOURI, IN SENATE, MONDAY, Sept. 18, 1837. [excerpt] Sept. 18, 1837 [...] I trust I have vindicated the bill from the stigma of being a paper currency bill, and from the imputation of being the first step towards the creation of a new national debt. I hope it is fully cleared from the odium of both these imputations. I will now say a few words on the policy of issuing Treasury notes in time of peace, or even in time of war, until the ordinary resources of loans and taxes had been tried and exhausted. I am no friend to the issue of Treasury notes of any kind. As loans, they are a disguised mode of borrowing, and easy to slide into a currency: as a currency, it is the most seductive, the most dangerous, and the most liable to abuse of all the descriptions of paper money. "That stamping of paper (by Government) is an operation so much easier than the paying of taxes, or of borrowing money, that a Government in the habit of paper emissions would rarely fail, in any emergency, to indulge itself too far in the employment of that resource, to avoid as much as possible, one less auspicious to present popularity." So said General Hamilton; and Jefferson, Madison, Macon, Randolph, and all the fathers of the republican church, concurred with him. These sagacious statesmen were shy of this facile and seductive resource, "so liable to abuse, and so certain of being abused." They held it inadmissible to recur to it in time of peace, and that it could only be thought of amidst the exigencies and perils of war, and that after exhausting the direct and responsible alternatives of loans and taxes. Bred in the school of these great men, I came here at this session to oppose, at all risks, an issue of Treasury notes. I preferred a direct loan, and that for many and cogent reasons. There is clear authority to borrow in the Constitution; but, to find authority to issue these notes, we must enter the field of constructive powers. To borrow is to do a responsible act; it is to incur certain accountability to the constituent, and heavy censure if it cannot be justified; to issue these notes is to do an act which few consider of, which takes but little hold of the public mind, which few condemn and some encourage, because it increases the quantum of what is vainly called money. Loans are limited, - - - - - Page 20 by the capacity, at least, of one side to borrow, and of the other to lend; the issue of these notes has no limit but the will of the makers and the supply of lampblack and rags. The continental bills of the Revolution, and the assignats of France, should furnish some instructive lessons on this head. Direct loans are always voluntary on the part of the lender; Treasury note loans may be a forced borrowing from the Government creditor — as much so as if the bayonet was put to his breast; for necessity has no law, and the necessitous claimant must take what is tendered, whether with or without interest — whether ten or fifty per cent, below par.
Hey, I didn't ping you. Like I said before, trends will emerge, and we will see.
Mark If America is destroyed, it may be by Americans who salute the flag, sing the national anthem, march in patriotic parades, cheer Fourth of July speakers - normally good Americans who fail to comprehend what is required to keep our country strong and free - Americans who have been lulled into a false security (April 1968).---Ezra Taft Benson, US Secretary of Agriculture 1953-1961 under Eisenhower
I agree, but remember, rising and falling prices are not inflation or deflation. They are a symptom of an increase or decrease in the money supply. Right now, its massive money printing. That's inflation.
"A leader, for a change." - Jimmy Carter, 1976 campaign slogan. Sound familiar? Here it comes again!
You're partly correct. Maybe someday you'll get it right.
Mark If America is destroyed, it may be by Americans who salute the flag, sing the national anthem, march in patriotic parades, cheer Fourth of July speakers - normally good Americans who fail to comprehend what is required to keep our country strong and free - Americans who have been lulled into a false security (April 1968).---Ezra Taft Benson, US Secretary of Agriculture 1953-1961 under Eisenhower
From an Austrian perspective, I'm correct. From a Keynesian perspective, I'm out in left field.
"A leader, for a change." - Jimmy Carter, 1976 campaign slogan. Sound familiar? Here it comes again!
and deal with it personally, everyone will be at risk.
#2. To: tom007, *Big Pharma*, *9-11*, *Old Wives Tales*, *Bible facts*, *Agriculture-Environment*, *CAFR* (#1)
Well outside of having no debt or living off the grid in a subsistence mode are there any real world suggestions to be made?
#3. To: tom007, richard9151 (#1)
are there any real world suggestions to be made?
http://lcweb2.loc.gov/ll/llcg/004/0000/00490037.tif
Senate, 25th Congress, 1st Session
Sept. 18, 1837
Page 37
#4. To: richard9151 (#2)
#5. To: Kamala, mirage, angle, tom007, nolu_chan, all (#4)
That is right. There is no way out of this. 100 trillion is probably too low of a number.
#6. To: richard9151, Kamala, angle, tom007, nolu_chan (#5)
how much more hyper- inflation is needed!?
#7. To: Kamala, richard9151, mirage, angle, tom007 (#4)
Why the obsession with more and more credit and lending if the FED could just print and dump?
Appendix to the Congressional Globe, Senate, 25th Cong., lst Sess.
Page 18-20
Issue of Treasury Notes.
Mr. Benton
TREASURY NOTE BILL.
Appendix to the Congressional Globe, Senate, 25th Cong., lst Sess.
Page 19
Issue of Treasury Notes.
Mr. Benton.
#8. To: mirage (#6)
#9. To: Kamala (#8)
Like I said before, trends will emerge, and we will see.
#10. To: mirage (#9)
#11. To: Kamala (#10)
You're partly correct. Maybe someday you'll get it right.
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