Why Bailouts Are Not the Answer 22 comments
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Keeping track of the ever mutating bailout debate is becoming increasingly difficult. With the Federal money spigots now thrown wide open, and with no one of influence advising restraint, the only debate is where to direct the torrent. During the past week, the talk began with Detroit and Citigroup, but by Friday had shifted to a massive "stimulus package" to bail out consumers. The early buzz includes some very large figures. But first, a bit of a recap:
On Monday, the $300 billion Citigroup bailout took center stage. Once again Henry Paulson decided to throw taxpayer funds into a bottomless Wall Street money pit. Shockingly, the Citigroup plan did not seem to demand any serious curtailment of lavish salaries and bonuses. Paulson's shameless largesse to his Wall Street friends has elevated financial industry bonuses to entitlement status.
"Remember Lehman" now seems to be the rallying cry to justify any and all financial bailouts. But Lehman's demise is in no way responsible for our current problems, and the decision to let them fail is the only bright spot in otherwise consistent record of policy mistakes. We bailed out Bear Sterns and AIG, and what did that get us?
The Citi bailout greatly increases the chances for a similarly misguided auto industry bailout. After all, if taxpayers ensure multi-million dollar bonuses for Citi executives, how can they refuse similar help for eight-figure auto executives and $70 per hour unionized auto workers?
It was inevitable that the size of these bailouts would up the ante for an economic stimulus package aimed at consumers. Not missing a beat, Barack Obama announced a $700 billion dollar fast-tracked package that will likely exceed $1 trillion before passage. (Trillions are the new billions.) The plan must be sending shivers down the spines of our foreign creditors who are expected to foot the bill. Add this cost to the hundreds of billions of prior stimulus and bailout packages, and the cost to our creditors is quickly heading into the multi-trillion dollar range. It can't be long before they cry uncle and repeat the words of prizefighter Roberto Doran "No Mas."
With so many familiar faces on his new economic team, Obama signaled his intention to "hit the ground running." With the possible exception of Paul Volcker, all of his top appointees share the view of the Bush administration that the root causes of our economic problems lie in the reluctance of banks and other financial institutions to lend. As a result, we can expect a virtual continuance of current policy.
It is no surprise therefore that both Democrats and Republicans offered healthy "huzzahs" to Henry Paulson's latest bazooka: $200 billion to purchase securities backed by auto, student, and credit card loans. It is hoped that with this transference of risk to taxpayers, lending institutions won't be so cautious, and the credit-fueled American economy can thrive anew. This is unalloyed insanity that can only lead to total ruin.
Paulson stated clearly that he would like the Fed to print as much money as it takes to revive the economy. Unfortunately the only industry likely to be revived by such policies is printing itself. But even this will not help the United States as the majority of our printing equipment is imported from Switzerland.
But what if the root of our financial problem is that American consumers have already taken on too much debt? By trying to force feed even more credit down the throats of already overly indebted Americans, Paulson's plan will only weaken the economy further.
Building on the groundwork laid by Paulson, the massive stimuli that will likely be pushed through by Obama and an overly eager Democratic Congress will further impede any real recovery. By swallowing up all available capital, spending to create government jobs will destroy far more private sector jobs. Rather than expanding government and increasing the national debt, policy makers should be thinking about doing the opposite.
The brutal truth that no one in Washington dares acknowledge is that our systemic economic problems can only be solved by a reduction in consumer borrowing and an increase in savings. We must repair our national balance sheet and a painful recession is the only path to achieve this. By interfering with the market's attempts to bring this necessary change about, all the proposals currently coming from Washington or bubbling up from think tanks and Nobel prize-winning economists, will only exacerbate the imbalances and lay the foundation for even greater losses and a larger crisis.
A short-run reduction in GDP is a sacrifice we must be willing to accept. If we swallow this medicine now, in the long run we will have a sustainable rise in GDP as higher savings leads to increased capital investment, greater productivity, and eventually a lasting increase in consumption.
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This article has 22 comments:
amen
Everyone including Obama and nobel prize winner Krugman is saying damn the deficit, damn increases in debt to be issued to foreigners, damn everything just print and spend, increase debt by more lending. I am afraid the minority like Peter and Jim may be wiser- since we can't do anything about this state of affairs we have to go through the wringer.
(seekingalpha.com/artic...) in seeking alpha.
Einstein Quote
This can ONLY result in the price of gold going through the roof over time. Indeed, it's increasingly likely the feds will outlaw its ownership again one day. Good luck to them.
Again, I totally agree with your perspective. But tell me, why don't the so called 'puppets with strings' don't see this and act accordingly?
Is it because they are not willing to encounter the political face loss. Or do they just love the remedy of debasing the currency patriotically and let the foreign lenders pay the (inflationary taxed) dollar bill.
My point is, that with this insane spending packages they come up with every week nowadays, there comes a moment in 2009 when the foreign willingness to back up Treasury is halted.
With inflationary practices the US Treasury tries to debase their currency with the smart tool of expanding the money supply. And you and I know that the inflation of our (world) currency is not measurable with tools. You can only see the effect of it.
The large indebtedness of the US consumer, and the state, its actually coming to the point of no return from what they are doing. Because this type of inflation the Treasury pursuits, faces another integrity problem and correspondingly; National security.
All this debt that fueled the American economy, is now being filled with an inflationary torrent, like you pointed out nicely. But add the fact that the same dollar is being funded by mostly foreign lenders, who are not yet feeling the effect of inflation in their hands. This is like a cigar from their own box!!
Only because the effect of inflation (higher prices with the same or smaller amount of goods) is not yet visible, and will not be visible for years! That is because of the debt position America is in. They now use 'their own' money (printing press money) to fill the debt bases gaps in the economy. Thereby NOT showing inflation. And in the meantime the lenders keep on propping up cash in Treasury bonds, now starting to show lower rates due to the Helicopter Bernanke.
Its insane! In 2009 or 2010 and far beyond their comes a Tsunami (T of Trillions) of inflated dollars on the markets, that instantly crashes the dollar currency. Thereby fueling havoc among the US foreign lenders.
I suspect it follows with great turmoil and political instability as governments fell into the trap of propping up a failed dollar. Just as the failed US economy right now.
There comes a time, this behaviour will be punished. And I don't like this development at all Peter.
Good article,
brgds
The government can either pay for unemployment or it can build infrastructure and create jobs. I'd rather have the infrastructure.
We do need intelligent government intervention. Paulson, however, is the poster boy for bailing out deadbeats. The sheriff is in cahoots with the outlaws. That seems to be the rule in the Bush administration.
No doubt this will end badly. Unfortunately the bipartisan sniper squads are well positioned to start yet another war on one another despite the objective facts that this mess was caused by BOTH of the ruling parties, and is being made worse daily by BOTH the ruling parties.
When will the sheeple take back BOTH "sides of the aisle", seat the duds alphabetically and remind them all daily that the Constitution they swore to preserve and protect has not one word about party loyalty in it.
If you vote for a Republicrat, YOU are the problem.
But now the Congress and its free spending majorities feel compelled to get in on the fun. Acting like they have some sort of mandate and a green light from the new Administration and the Fed, they are cooking up an ADDITIONAL trillion dollar stimulus pacakge for a start. (As a reward to their voters perhaps?)
But it doesn't really matter why they're doing it, because in the end they will only once again only prove we can't SPEND oursleves rich! It makes one wonder what it is about Economics 101 they can't comprehend.
(Like I said, I'm not a gold bug. But BUY GOLD, it's the only way out.)
It isn't simply semantics or logic to point of that when any business can be saved (bailed out) or condemned to failure (allowed to fail) by "unseen powers behind the throne" then we don't have a capitalist economy but something that is closer to socialism.
Business failure is an essential part of capitalism. When there are "eminences grises" behind the scenes with the power to save (or "allow" to fail) any business they deem worthy or unworthy, then we have one of the many forms of socialism.
For years economists have pointed out that socialism has crept into America under the radar of anti-communist rhetoric, as oligopoly capitalism, but as long as the system created prosperity and jobs, no one payed any attention to them. Even so, most Americans call this system "socialism for the rich."
It is only a short step from socialism for the rich to "socialism for the rest of us."
"I have seen the enemy and he is us." Pogo.
Our Congress can't run itself and now is going to put stipulations on all those who begged for this money . If this isn't a leap to Socialism, then what is.
The best thing thosse that took the money can do is get their house in order and pay it back to get the feds off their back and hopefully have learned how to run a business.
You hear on the news that most of us are against these bail outs. If it is true then we should see it in the results of the next couple of elections when the majority of the Democracts will be retired.
IMO, the "fair tax" is a required step towards fiscal sanity -- the return of control over the earner's money, to the earner!! When *I* can decide when and even *if* I want to spend, vs. save -- then *I* am in greater control of how highly leveraged I am. Currently we each have hidden leverage under the guise of the portion of my taxes that go to paying U.S. debt and even creation of further debt. When we remove the government's preemptive right to our money...then we the people can force deleveraging on our own behalf. Add a balanced budget amendment and we than have the requirement for the government to do the same.
fairtax.org
I encourage everyone to at least read up on the "Fair Tax", and consider joining!!
We need to end this way of thinking that anyone, including government, is responsible for our needs, other than OURSELVES.
On Dec 02 11:04 AM Lok Sang Ho wrote:
> It is certainly correct that Americans need to keep spending within
> their means. But the immediate concern must be to save the jobs
> of Americans and the homes of those who have been working hard and
> paying their mortgages honestly. Without jobs and incomes, where
> can savings come from?
>
We don't live in a capitalist society - we live in a socialist one. It's been this way for a long time. No go convince the rest of the population that socialism has failed us and we should try our hand at capitalism! BTW, most of the general population thinks capitalism has failed - they're blaming the wrong system.
"None are more hopelessly enslaved than those who falsely believe they are free."
Johann Wolfgang von Goethe