Delusions of Debt 21 comments
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Make no mistake. Our country is in the midst of a financial crisis of epic proportions. We are in a long national emergency. In the last 6 months, we have been on the brink of financial collapse twice.
First, Bear Stearns (BSC) was going to declare bankruptcy unless it was taken over by the end of the weekend. If this had occurred, it is believed the thousands of transactions with other banks throughout the world would have led to multiple bank failures and a freezing up of the financial system. Ben Bernanke and Hank Paulson came to the rescue with $29 billion of our tax dollars, guaranteeing the Bear Stearns mortgage portfolio on behalf of JP Morgan (JPM). Ben then opened the Fed discount window to all Investment banks.
So, these prestigious institutions can now exchange their toxic waste mortgage derivatives for Treasuries. You and I are on the hook for the inevitable losses. A government that spends $12 billion a month on a war that shouldn’t have been fought – but won’t exit until we win, figures that the numbers have become so large that the public can’t tell the difference between $29 million, $29 billion, or $29 trillion.
Two weeks ago, Helicopter Ben and Hammering Hank swooped in and saved the day again. Fannie Mae (FNM) and Freddie Mac (FRE), who originate 80% of all the mortgages in the U.S., were on the brink of collapse. Yet again, they were deemed too big to fail. They have in excess of $5 trillion in mortgage debt on their books, virtually no capital, and billions of losses to be recorded in the next few years. Hank committed your tax dollars to buying their stock.
Your government has essentially guaranteed the $5 trillion of debt, to go with the $9 trillion already on the books. The same weekend, IndyMac was taken over by the FDIC. This is the 2nd biggest bank failure in the history of the U.S. Depositors will lose $500 million of uninsured deposits. The scenes of average Americans lined up at IndyMac branches were reminiscent of the 1930s.
Get used to it. There will be many more bank collapses in the next few years. The years of bad decisions and risk-taking will inflict pain on many people.
Congress passed a housing rescue plan that will cost you, your children, and grandchildren at least $300 billion. George Bush again showed his moral backbone by signing a bill he had said for months that he would veto. It is amazing how free market capitalism is the mantra when prices are going up, but big government socialism is the answer when our multi-million dollar corporations make drastic risk management mistakes in search of obscene profits. We are now on the hook for all the past and future bad decisions of Fannie Mae and Freddie Mac. The Congressional Budget Office estimates that backing these two awful institutions will cost taxpayers $25 billion. Remember the government estimate for the Iraq War of $50 billion. We are at $700 billion and counting. ]
Our politician leaders continue to spend our money with absolutely no plan to pay for these initiatives. At the end of the day, two companies that have lost a combined $13 billion in the last 9 months can now lose billions more without a worry. It is good to see that their CEOs really believe in pay for performance.
As you can see from the chart below, they have certainly earned their multi-million dollar salaries.
click to enlarge images
A congressman with a moral backbone, Representative Ron Paul, voted against the $325 billion bailout boondoggle bill. His view of this bill hits at the heart of the issue:
It is neither morally right nor fiscally wise to socialize private losses in this way. The solution is for government to stop micromanaging the economy and let the market adjust, as painful as that will be for some. We should not force taxpayers, including renters and more frugal homeowners, to switch places with the speculators and take on those same risks that bankrupted them. It is a terrible idea to spread the financial crisis any wider or deeper than it already is, and to prolong the agony years into the future. Socializing the losses now will only create more unintended consequences that will give new excuses for further government interventions in the future. This is how government grows – by claiming to correct the mistakes it earlier created, all the while constantly shaking down the taxpayer. The market needs a chance to correct itself, and Congress needs to avoid making the situation worse by pretending to ride to the rescue.
At a recent closed-door fundraiser in Texas, where he thought it was safe to tell the truth, President Bush summed up the financial crisis in his usual blunt manner: "There’s no question about it, Wall Street got drunk, that’s one of the reasons I asked you to turn off the TV cameras. It got drunk and now it’s got a hangover."
So, the man who spoke these words last week will buy a drunkard $325 billion of Jack Daniels by signing the bailout bill. A little hair of the dog that bit you is good for a hangover.
This 600 page "Mother of all Bailouts" monstrosity, as Ron Paul has described it, has some interesting tidbits buried in the fine print. Mr. Paul’s summary of the bill is as follows:
- While this bill is often referred to in the news as a "$25 billion" plan, the final amount will likely be much, much higher. The Treasury’s previously limited $2.5 billion line of credit to Fannie Mae / Freddie Mac, which in 2001 Ron Paul proposed be abolished, has instead been increased to unlimited. The Treasury can now buy an unlimited amount of Fannie / Freddie housing securities and stock. While this may help "bolster confidence" in these companies, as the LA times mentions, don’t expect it to do much for the dollar! Once upon a time, our national currency was backed by gold. More recently, it has been backed by US Treasury securities. Now it will be backed – at least in part – by Fannie Mae / Freddie Mac housing securities – securities that are collapsing on the open market because no one else wants them.
- In yet another example of persistent, big brother, big government, police state creep, anyone working in the mortgage industry will now be required to be fingerprinted.
- Finally, buried deep within the bill, and not mentioned in any MSM source that I am aware of, is the provision that every credit card transaction will now be reported to the IRS. How this fits in to the housing crisis is anyone’s guess.
- A provision to increase the national debt ceiling by $800 billion. This is something Congress has to do every few years, as spending is clearly out of control.
The national debt ceiling is now $10.8 trillion. This is like giving a spendaholic an increase on their Amex credit line. Give Congress the ability to spend $10.8 trillion and they will.
Below is the National Debt.
$9,607,997,048,328
The amount is $9.6 trillion. It was approximately $5.8 trillion when George Bush took office. These figures do not include the unfunded liabilities exceeding $50 trillion for Social Security and Medicare liabilities.
It appears from a quick perusal of the chart below that 90% of the national debt has been generated since 1980.
Republican Presidents have been in charge for 20 of those 28 years.
Of course, Democrats have been in control of Congress for most of this time period. This proves that when Presidents and Congress put their heads together they can achieve big things – pushing our great country to the brink of economic disaster.
At one time, not long ago, we owed this money to ourselves. U.S. citizens and U.S. financial institutions owned the debt of the U.S. government. This is no longer the case. Foreigners now own almost 50% of our debt. This has occurred because the U.S. has lived above its means for decades.
Our trade deficits have left us vulnerable to the people we owe. Warren Buffett describes the situation succinctly:
We were taught in Economics 101 that countries could not for long sustain large, ever-growing trade deficits ... our country has been behaving like an extraordinarily rich family that possesses an immense farm. In order to consume 4% more than they produce – that's the trade deficit – we have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own.
When a country has a massive amount of debt it is in their self interest to create inflation. By creating inflation, you pay back the debt with depreciated dollars. This makes the debt less burdensome.
It is not a coincidence that for the 1st 200 years of our glorious Republic we had very little inflation. The country had very little debt. The Federal Reserve was created in 1913.
As you can see in the following graph, inflation began to accelerate after the Federal Reserve took control of our currency; accelerated further after Roosevelt’s New Deal; popped after Nixon closed the gold window; and has skyrocketed since 1980 at the same time that our debt skyrocketed.
This persistent inflation has led to the dollar losing 95% of its purchasing power since the creation of the Federal Reserve. As the biggest debtor in the history of the universe, we are now at the mercy of China, Russia, Japan, and OPEC. They can start to call the shots.
Would gas be $4.00 per gallon if we were running surpluses and the Euro was .85 to the $1.00? Not a chance.
It amazes me that this country does not listen to the common sense principles regarding our economy put forth by Ron Paul:
The Fed creates new money and uses it to purchase securities from banks. Flush with funds, these banks seek to put this money to use. During the Fed's expansionary period, much of this money went to home loans. Through a combination of federal government inducements to lend to risky borrowers, and the Fed's supply of easy money, the housing bubble took shape. Fannie Mae and Freddie Mac were encouraged to purchase and securitize mortgages, while investors, buoyed by implicit government backing, rushed to provide funding. Money that could have been invested in more productive, less risky sectors of the economy was thereby malinvested in subprime mortgage loans.
The implicit guarantee from the Fed is quickly becoming explicit, as those institutions deemed "too big to fail" are bailed out at taxpayer expense. Wall Street made a killing during the housing bubble, reaping record profits. Now that the bubble has burst, these same firms are trying to dump their losses on the taxpayers. This approach requires more money creation, and therefore debasement of all dollars in circulation.The Federal Reserve, a quasi-government entity, should not be creating money or determining interest rates, as this causes malinvestment and excessive debt to accumulate. Centrally planned, government-manipulated economies always fail eventually. The collapse of communism and the failure of socialism should have made this apparent. Even the most educated, well-intentioned central planners cannot plan the market better than the market itself. Those that understand economics best, understand this reality.
In free markets, both success and failure are options. If government interventions prevent businesses, like Bear Stearns, from failing, then it is not truly a free market. As painful as it might be for Wall Street, banks, even big ones, must be allowed to fail.
The end game for this policy of monetary inflation is that the money in your bank account loses purchasing power. So, by keeping failing banks afloat, the Fed punishes those who have lived frugally and saved. The power to create money is a power that should never be granted to government. As we can plainly see today, the Fed has abused this power, and taxpayers are paying the price.
If you are in a deep hole, the first thing you should do is stop digging. Our government keeps digging deeper and deeper. This delusion of debt will surely end in tears.
Disclosure: I have no positions related to this article.
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This article has 21 comments:
2 things i dont agree upon:
- socialism has failed: look at all skandinavian countries for refutal.
- central planning always fails: only if you add the premise of incompetent (aka professional) politicians who run it.
if you look back in history you will see that when successful people have taken office, their respective countries have always fared well. when professional politicians (ones without any other experience than barking) have ruled disasters have always occured.
i will finish with a quotation of GWB: "Governor Bush does not subsidize failure!". How ironic the president does...
Debt should not be measured relative to GDP because we have been using said debt to continually fund our growth. Look at this past quarter; GDP rose 1.9% and everyone believes our economy isn't that bad, but the consumption aspect was all funded with debt for the "stimulus" plan.
one thing. the gov't can always pay for things - like the money pit called the war in iraq - by printing money. no problemo.
But look at the US -- it was created with the express intent to protect the people from their government (i.e., "politicians"), and those fundamental structural protections have been steadily eroded, not lasting even a couple of hundred years.
What can be done about it? People remain as flawed as ever -- stupid, susceptible to false promises, and being played off against each other.
It is child's play for an unending stream of politicians to circumvent any system that can be changed, and probably not impossible to circumvent those that cannot be changed, assuming that inflexible systems do not collapse into rubble almost immediately.
I don't see how we are to starve government when the very means of controlling the government is the government itself. One would have to require that the voters be insightful and contemplative, suspicious and thoughtful, with their wits honed to a fine edge. Yeah, like THAT's ever gonna happen!
I could go on about all afternoon about what this country should have been doing, but look what we got for all that debt: 4,000 dead servicepeople, hundreds of thousands of dead Iraqis, collapsing bridges, a plutocracy, a few more billionaires and millions newly impoverished---this administration is like a kid spending his paycheck on a new tattoo.
If the bank owners were personally responsible for loan losses do you think they would have made all those bad loans? They can socialize the losses and take all the profits, so they do. Fractional reserve loaning is totally corrupt, a government-approved Ponzi scheme.
Loans from fractional reserve banks are inherently “liar’s loans”, the lie being, the bank is loaning money that it really doesn’t have. The Fed and the thousands of banks creating these liar loans create inflationary conditions that actively discourage thrift: people throw their money at something that hopefully will go up a lot in price in order to hold onto the buying power of their money, trading the certainty of being screwed in the long run for the chance to possibly avoid being screwed at that future time. Debt-money leaks out value like a bucket with a hole in the bottom leaks out water.
This is just going to keep happening until the basic cause gets fixed.
First of all, WE NEED OUR OWN DEBT-FREE CURRENCY, backed by all of the real estate owned by the United States (which is, in fact, all of the real estate within the national boundaries, and really more than that including other nations whose continued claim to existence depends on U.S. defense of that claim; case-in-point, Kuwait, 1991), we should distribute that new currency in monthly equi-dollar amounts to all legal residents (amounts due minors to be held in trust accounts). Also, we need bankers to be held financially responsible for any loss of depositors’ money (if they want to gamble with fractional reserves, it’s the bank owners who should pay, not taxpayers, and if you lose your own money by depositing it in a fractional reserve bank, again, it’s YOU who should pay, not taxpayers. How can we ever expect things to get right with a system based on socializing losses?
Next, we should REPLACE ALL FEDERAL NON-CONSUMPTION TAXES with a one-half percent(+/-) Tobin-type tax on ALL outgoing electronic transactions (avoidable by using cash for all transactions, and, since avoidable, the tax will be arguably being paid voluntarily) in order to:
1. Pay off the national debt,
2. Repair the damage that the U.S. government has done to persons and the free market by favoritism (reparations for having “Constitutionalized” slavery might be considered) and excessive regulation (e.g., we need about 4 times as many doctors and healthcare professionals as we currently have in order to have enough competition extant to get medical costs back to the realm of affordability, and we would have had them had there been a free market in medical education), and
3. Extract and destroy excess currency as required to avoid inflation.
No other form of Federal non-consumption tax would be allowed (this tax could go to zero when it has done its job if there is no inflation in the system).
The monthly equi-dollar distribution amounts should be of sufficient quantity (assuming $1000, that’s $24,000 Federal tax-free per couple, plus whatever wages and other income they bring in) to be considered sufficient replacement for all forms of corporate, farm and personal welfare, including subsidies, welfare, tax incentives, Social Security (to be phased out), Medicare, the Federal Minimum Wage law, and ALL OTHER forms of Federal financial redistribution schemes; there won’t be any need for separate Federal retirement accounts since there won’t be any income or investment taxes.
For those who like their political solutions morally justified, the monthly equi-dollar distribution amounts can be considered “justified compensation” for the denial of free access to all the property that the government has privatized.
With everybody getting the same monthly amount, and everybody paying the same percentage increase of fiat money, there is no redistribution nor inherent injustice in the plan.
IIRC, one of the Rothschild's died in the 1800s from an infection that we would cure today with $4.00 worth of antibiotics. All of his gold couldn't save him. I'll happily take today's goods and prices over the goods and prices of 1914 any day!
If the government was restored to its original form, which was to be a place for representatives of involved and educated voters, and not merely the super rich, to decide on beneficial group actions, we could get back to reasonable economic reforms.
If we allow the oligarchs to decide our economic fate, we deserve what we get and we should, therefore, stop complaining.
Separately, I've no idea who Ron Paul is but if the quotes are true he sounds like an insightful and straight-talking guy. Want to swap him for Gordon Brown?
The problem with Fannie & Freddie is not that they loaned money to people who bought houses. That would have happened in any case. The problem with them is that create a moral hazard by socializing debt and that they provide very little benefit to the taxpayer, some benefit to their shareholders and an undeserved payout to the incompetent executives.
The author finds fault with Iraq War spending. Is there not some value to the nearly seven years without a terrorist attack on US interests? The last attack in 2001 was quite costly. If indeed the Iraq War purchases security, it is worth the expense.
That said, it is hard to disagree with the conclusion that Congress spends too much and has proven to be reckless stewards of the economy. Leaving aside Iraq War spending (which is arguably necessary), Bush has disappointed most fiscal conservatives by not addressing Congressional overspending.
David Lentz absolutely nails the problem: apathetic, uneducated, gullible voters.
Joyful Alternative seems none to joyful, and is asking for even more gov't services. What did we get from the Iraq War? More than dead people. 25 million free people (and at least one of the Iraqis deserved to die -- he and his sons -- good riddance to them).
carey_jim: I do not see big business as nefarious entities. When business succeeds, so do Americans. These businesses are not oligarchies. They are shareholder owned (mostly). Buy their stock and share in their success.
The problem with Ron Paul is that he is an awful politician. The problem with the big spenders in Congress is that they are great politicians.
How could anyone think the American government is an oligarchy?
1/2 of 1% of American families own 40% of the wealth of America and 50% of American families own 3% of the wealth.
We are a democracy where the poor consistently elect their betters, the rich. That's obvious.
I was just being funny.
and www.patriotsquestion91.../
One knows that the discussion has devolved when Ron Paul supporters weigh in against the Fed without offering explanation (I guess they think the Fed practices evil magick). But when the 9/11 truthers get involved, further discussion is not possible. They are nutters -- disconnected from reality.