With the ever increasing amount of taxpayer money handed over to "bail out" financial firms, manufacturing firms and Insurance firms, the Treasury has given a new meaning to the term "venture capital". Venture, by its very definition, involves risk for reward. But risk and reward for whom? All the risk for the U.S. taxpayer and all the reward for company CEOs and boards. Has any of the money stuffed in to the back pockets of the banking community actually done any good? For the economy, no. For the U.S. taxpayer (who is the real investor, as this whole thing involves their money), none. For the recipients themselves, yes. What have these institutions done with the free money? JPMorgan Chase (JPM) used some of it to buy Washington Mutual for $1.9 billion and Bear Sterns for $1.1 billion. Bank of America (BAC) bought Merrill Lynch for $50 billion. Talking about return on investment, Fannie Mae, even after receiving $100 billion, lost $29 billion in the third quarter. AIG Insurance (AIG), after having received $85 billion, followed by an extra $38 billion, lost $25 billion in the third quarter. And now we are witnessing even more money being proposed for even more "bailouts".
As a side note, after each new merger, the number of controlling banks reduces and the choice for the consumer is slashed. Competition is slowly being removed from the banking sector and we are witnessing the birth of a banking monopolization. It will come as no surprise that the cost of banking for the consumer will rise alongside.
"Bailing out" is only worth it if you can remove more water than is coming in, and with every "real economy" report that comes in, the waters rise even faster. General Motors (GM) is failing fast because it makes stuff nobody wants to buy. In free market terms, that means that it goes to the wall. This is the system that the Fed have stood by for all those years as they put their trust in "free market forces". Have they been blinded to the consequences of their actions and think that the solution to failing banks and manufacturers is to simply give them more money without even looking at their balance sheets? Would you trust Paulson or Bernanke to run your hedge fund? I wouldn't think so. Let's take a look at exactly how much the "bailouts" have come to so far...
Total: $2.7 trillion
Not a single dime of the trillions of dollars thrown at the problem so far has led to an improvement in the system that it was meant to fix. Quarterly losses are mounting; banks, along with manufacturing companies, are dumping employees and slashing costs to "weather out the financial crisis", as if the same crisis can be cured simply by grabbing their employees' tax dollars and then firing them to reduce costs.
It's the people who are being fired who are the engine of the real economy. They're the ones who buy financial services, sign up to interest bearing mortgages, buy General Motors' F 150 pickups and groceries down at the local Target (TGT) or Wal-Mart (WMT). The financial sector can do whatever it wants with the free money, but none of it will benefit the people for whom it was meant originally.
The U.S. is shooting the final bolt at the problem. I say the "final bolt" because when they go to borrow the money from foreign governments and investors, they will see that the well is drying up fast. For several trillions of dollars to be raised, the amount of Treasuries that will have to be sold will bring the forces of the free market to bear. An overabundance of product brings a consequent reduction in price. Can anyone say "bond collapse"? Every foreign investor currently holding the bonds already bought will find themselves with a serious hole in their collective pockets. Uncle Sam will have just maxed out his credit card.
Is this the big talking point at the upcoming G20 summit? Each and every party will have to come out of this meeting with something. Somehow, the foreign debt of the U.S. will have to be accounted for. China and Japan will want to feel that their foreign reserves are actually worth something. The call for a "New World Order" is back in the headlines and heralds a ground shift in how the world will be run. There is no alternative, as the old system has gotten to the point that it can no longer survive. The engine that kept the "American dream" alive and pushed the growth of China is now gone as there are no more golden eggs to be laid. That goose was shot a while ago by Alan Greenspan and successive Fed chairmen. Keeping an eye on the 10-year Treasury yield these days has become a nail biting nightmare.
So with the "bailing out" of moribund institutions, all that has been achieved here is the certainty that things will steadily get worse. Nothing that has been done so far has reduced unemployment, increased tax revenue, increased the value of real estate or stopped the soup kitchen queues from getting longer. It has all been for nothing; well, except for the Royal Bank of Scotland (RBS) execs who threw themselves a $300,000 champagne party, no doubt to celebrate their collective genius at managing other people's money.
So why throw even more money at the problem when it obviously is not solving the problem? In the case of General Motors, the loss in unemployment terms could come to 2.5 million. Gone would be the health care that the company provides its current and former employees. This would seem like a worthy candidate, as the fallout is so great that this company is just "too big to fail." But the system has already failed and the inevitability of more company failures is guaranteed - there is no getting away from this unless the system is turned on its head. The real economy has to drive the means of production and not the other way around. There is no point in General Motors burning through all their savings for another year, using more taxpayer money if, by the end of that year, there is nobody left to buy their products. This simply amounts to an unbelievably gross waste of money. There is no return on this investment and the only upside is that some of the employees will get to keep their jobs and healthcare a little longer. Thousands of jobs will be lost via mergers and cost cutting schemes, anyway.
The only realistic way to save General Motors is to invest in what General Motors actually earns money doing: selling automobiles. This is not achieved by handing them cash; it is achieved by investing in their customers, who, at present, are a quickly diminishing commodity. The latter is the indispensable component of the system, not the other way around. There are a lot of other auto companies out there that offer much better products at a lower price, and if GM is not up to the mark, it's history anyway.
If the $2.7 trillion dollars had been invested in rebuilding America's economy, i.e. creating jobs for the unemployed, repairing infrastructure, renovating derelict factories, keeping people in their homes, keeping them mobile and maintaining a disposable income, reducing their tax payments, then the return on the investment would have been greater. A new fair banking system, to replace the current racket that has caused wholesale destruction, could have been organised along the lines of credit unions, where the customers actually own a part of the institution. This would have heralded a step in the right direction to recovery, by basing the economy on real value, not CDOs, MBSs and derivatives, which is just a way of lighing a fire downwind of you and hoping the wind doesn't change. By doing precisely the opposite, the available capital has been squandered and ended up in the pockets of the same people who are responsible for the mess in the first place.
It's time to stop the deliberate waste of public money and hold our "benefactors" accountable. The "useless eaters" (Henry Kissinger) are watching their hedge funds being managed by the largest coalition of organized crime in human history.