Financial Crisis: This Is the Real Deal

Regarding the AIG (AIG) bailout, yesterday I was explaining to a reporter why the takeover by the Federal Reserve is quite different from a takeover by the Treasury Department and very different from Congress enacting additional fiscal stimulus, in terms of the “cost to taxpayers.”  I was saying that when the action is taken by the Fed, it’s a monetary policy intervention (suggesting only the risk of an “inflation tax” from the injection of Fed money into the economy), rather than a fiscal policy intervention through an increase in the budget deficit (implying necessary tax increases or spending cuts down the road). 

This distinction is what allowed the Federal Reserve, in their official statement last night, to reassure Americans that (emphasis added):

The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers…The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries…The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. 

…and led Treasury Secretary Paulson to concur:

“We are working closely with the Federal Reserve, the SEC and other regulators to enhance the stability and orderliness of our financial markets and minimize the disruption to our economy,” said Treasury Secretary Henry Paulson. “I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect the taxpayers.“

But then came the breaking news of the Treasury Department announcing:

…the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve.  The program will consist of a series of Treasury bills, apart from Treasury’s current borrowing program, which will provide cash for use in the Federal Reserve initiatives.

In other words, the Treasury will be issuing new debt to help finance the Fed’s takeover of AIG–an action that the AP story describes as “an unprecedented action in which Treasury will be selling debt securities in the form of Treasury bills for the nation’s central bank.”

Uh oh…  Never mind what I said earlier.  The lines between monetary intervention and fiscal stimulus (and exposure to American taxpayers, current or more likely future) have just been blurred.

And have you checked out what happened to the stock market yesterday?

Whoa.  This is the real deal.  Are you paying attention to what the candidates have to say about it?

Disclosure: None

Comments

[noni1:]

"The real deal". How childish. The Treasury issues debt all the live long day to the tune of several hundred billion dollars per month. Stop the fear mongering, your puts will expire worthless Im afraid.

2008 Sep 18 03:12 AM

[RCK:]

Enter your comment hereThis is no 1929. Central banks all over the world have better tools to handle crisis situation. And the fact that they are now all coordinated should be no surprise. Today Hang seng down 4.4%, before interbvention, recovered 4% after intervention, 20 minutes before clsoing. The fear is about fear. I still have confidence in the monetary policy.

2008 Sep 18 04:57 AM

[fxtrader07:]

Yes. I do. McCain the bum said AIg should be allowed to fail and talked about moral hazard. What a display of utter economic dumbness and ignorance. It's like refusing to let the firebrigade put off the fire in the city centre because the homeowner ther played with fire and should not be encouraged further. heck, who cares if the entire city burns down. I am sure McCain is diversified enough with - how many 5-7?- houses to weather it.
frickin' unbelievable. It seems, the man could even be worse than GWB - and that MEANS something.

2008 Sep 18 05:06 AM

[vanyali:]

Unfortunately, Obama doesn't seem any better on economic policy. Different, but no better. We have no good options in this election, and it seems that we increasingly have no good options in this economy.

2008 Sep 18 07:56 AM

[Fabien Hug:]

Presidential options are effectively not that good. One thing is certain though, Republicans are experienced trouble makers.

2008 Sep 18 08:36 AM

[leh:]

Obama's a smarter, more intense and dedicated guy who is temperamentally better suited to the immense challenges ahead than Grandpa McCain, who in the end chose Bush in a skirt as his running mate. I also think Obama would be a much superior global diplomat, which ought not to be underestimated in a time when international cooperation is needed more than ever.

Palin may be a shrewd governor but she's far too much of a wild card for me, especially after 8 years of Stupid, and both she and Bush share the same maddening conviction that 1) they're somehow divinely inspired and 2) that they can just follow their gut and "not blink", and somehow this will suffice. We've had more than enough of this seat-of-the pants governance, and it's been disastrous.

Biden's a dedicated public servant with a deep background in both foreign affairs and the energy. In fact he authored a bill recently that would subsidize advanced battery development here in the US for hybrid applications--somethin... we desperately need.

IMO there's no comparison between the quality of the choices here, and I think the ongoing economic crisis will be deadly for the Republicans in November. It's already pulled McCain back down in the polls after his soccer mom bounce. Look for a landslide if things continue to deteriorate.

2008 Sep 18 08:51 AM

[Jason Rines...:]

Pain has spread from the lower class to the middle class to the wealthy. Now Washington is paying attention, because it effects them personally. This Federal government is an oligarchy, nothing more, nothing less. The citizenship will vote in whichever economic mental dwarf as President they best see fit with crossed fingers. It will not matter. 25 years of credit bubble which accelerated the last seven years is bursting. Deflation/Inflation is what is in store for the population. The Middle Class historically takes it in the rear the hardest, small businesses close up, unemployment will accelerate quality of life is going down and will go down much further for most in the next four years. But the same Middle Class doesn't just die, they revolt at the voting booth as the pain we see now becomes desperation. And if they feel they cannot make political changes they revolt physically. Americans will not be servants of foreign nations and that is what has begun occuring and will likely accelerate over the next four years as sovereign wealth buys up major US institutions. Washington has had little choice of late but to capitulate to sovereign wealth. Washington is playing a very dangerous game of not moving very quickly on energy independence.

2008 Sep 18 09:47 AM

[User 265135:]

noni1 -- your comments are not helpful. you sound sniffy, haughty, and very defensive. what's bothering you? if you are so confident in the market you should be sleeping better at night than you are.

2008 Sep 18 10:32 AM

[dr55mac:]

Congress created this crisis with the end of red lining and the CRA act . after the made banks make riskier oloans they then hit Hud up for ways fopr the banks to get them off their books --Freddy and
fanny. kThis ushersed in the era of the MBS and government enabled greed . We need reregulation not more of this stuff. I hope they nail Barny and Chris for this!!!

2008 Sep 18 11:30 AM

[Brice Timmons:]

This is, actually, quite bad. No, it is not 1929. We have significantly more wealth than we did in 1929, but the collective drop could be as bad in relative terms. If it is not, and we delay the impact of institutional collapse through deficit spending and nationalization of debt, then we will merely be setting up the next crisis. The debt must be serviced either through actual tax hikes (bad for business) or inflation (bad for business). The market will punish bad decisions, period. We can do it now, perhaps in a controlled fashion, or we can do it later, perhaps in a more violent fashion.

2008 Sep 18 12:15 PM

[alajac:]

Are we going to let the central bank`s screwups drown us all?

HOW TO FIX THE ECONOMY (change the system, not the faces)

a plan to stimulate the economy, lower taxes, start paying off the National Debt,
alleviate poverty and decrease crime

by replacing our OLD economic system with a NEW system based on

a new and debt-free U.S. currency to replace Federal Reserve Debt-Money,

a 0.5% tax on electronic transfers to replace the Federal Income Tax and the IRS,

and $1000 per month privatization compensation (non-Fed $) for all legal U.S. residents

There is NO BENEFIT AT ALL in having a Central Bank (well, none for us) compared to having the U.S. Treasury print and distribute our own debt-free money to ourselves. THE ONLY DIFFERENCE between having a central bank or not, is that ``One system costs us 95% of our wealth every hundred years and puts us and our posterity into mind-boggling debt until the end of time``... and the other doesn`t.

So the first thing we need for our NEW SYSTEM is our own, debt-free U.S. Government fiat currency, backed by all the property within the nation`s borders. Obviously I disagree with those who insist that `only gold is real money`. The hoarding of gold-backed money has led to and prolonged many U.S. economic depressions which explains why the U.S. has tried and abandoned `the gold standard` many times over the years. ``Bad money drives out good`` means people will always wind up using as money whatever has the least actual value that will still be accepted by others to facilitate trade. Debt-Free fiat money will work just as well as Federal Reserve fiat Debt-money, but without all the nasty side-effects.

Another problem with the OLD SYSTEM is that income-based taxation creates wasteful tax avoidance behavior, requires an expensive tax reporting industry and an intrusive collection bureaucracy, and is, arguably, a form of `involuntary servitude`. Under our NEW SYSTEM, we should replace all income-related taxes with a one-half percent, automatically-collecte... electronic transfer tax (also known as a `debit tax`) which will be avoidable by transacting business using cash or barter. This will not only rid us of the IRS (saving the billions currently spent on `tax reporting`), it will also end the current penalization of work and entrepreneurism, as well as freeing up untold billions currently spent on `tax avoidance`. A debit tax is `more just`, corresponding closely with ``benefits previously-obtained`` rather than penalizing labor and industriousness, and (as it can be legally avoided, even if only inconveniently so) this debit tax can be considered ``voluntarily-paid``. A small electronic transfer tax will also act to discourage excessive short-term market speculation and should be able to raise enough revenue to begin paying off the National Debt. The tax should be either paid with the new debt-free money or exchanged for it by the Treasury with tax revenue on Federal Reserve money being used to start retiring the National Debt.

As argued by Tom Paine in his 1797 essay ``Agrarian Justice``, the third problem with the OLD SYSTEM is that, because governments privatize all of their claimed property (allocating it however they like), everyone winds up being denied free access to all property (other than that which has been specifically allocated to them) without being compensated for that loss. That`s not a problem for those with access to capital and property ownership, but for the rest of us, it is totally unfair and creates a slanted playing field upon which wealth gravitates to the already wealthy and the well-connected. However governments allocate their property, every method has the same result of `denial to everyone of free access to all land`. It has taken 200 years for this injustice to be acknowledged in a place and time where something can be done about it and when events have conspired to make rectification not only just, but vital to our economic survival. Just as compensation for eminent domain takings are provided for in the 5th Amendment of the U.S. Constitution, governments should provide compensation for denying everyone `right of free access to all property`.

Thus, in order to remedy this, we must elect a Congress that will PAY EVERY LEGAL U.S. RESIDENT `Adequate and Equal Compensation for Denial of Free Access to U.S. Property`, compensation which can FUNCTIONALLY REPLACE ALL FORMS OF PERSONAL AND CORPORATE WELFARE AND SUBSIDIES, including rescinding Federal Minimum Wage laws and phasing-out the Social Security system. (Once everyone is getting `Denial of Free Access` compensation their whole lives, most people will be able to save enough to be able to comfortably cease working at some point in their lives.)

Our NEW SYSTEM should pay $1000 per month (of our new, non-Fed, non-Debt-Money) to every legal adult resident. Compensation for minors should be held in a trust fund to avoid incentivizing `baby factories`. Since everyone gets the same amount of compensation, this plan is not wealth redistributive, but will give the least wealthy the biggest relative monthly percentage increase of wealth. Because when people HAVE something, they have something to lose, we can expect a reduction in all sorts of crime under our NEW SYSTEM as well as better childcare, less poverty, more rural homesteading, better maintained urban areas, less intrusive and cheaper government with lower military-related expenses and a safer world in general. Once this NEW SYSTEM gets going, I expect residents of other countries will insist their governments either copy our NEW SYSTEM or else apply for U.S. statehood as Texas did in 1845.

HEALTH CARE...The AMA and FDA work to constrain competition in order to maximize the medical and pharmaceutical industries` ability to extort unconscionable prices for services and substances that should be affordable out-of-pocket. We need to train up thousands more doctors and other healthcare professionals and to decriminalize and unbridle access for adults to WHATEVER drugs adults want, obtained from WHATEVER source adults decide thay want to obtain them, for WHATEVER purpose those adults wish to use them, and let the market work to make prices of normal medical help and pharmacology affordable.

SEND A MESSAGE to candidates running for Congress in 2010 and 2012 that they need to support the three changes (new currency, new taxation, and privatization compensation) required to implement this proposed NEW SYSTEM with a MASS WRITE-IN CAMPAIGN that `blows socks off` from DC to LA. I will be registered as a Write-In Candidate for US President in Michigan, and in other states as I get help with other states` registering processes. Pass this message along to several people every day (or, even better, to everyone you know today, and to everyone you meet from now on). IF EACH OF US EVERY DAY CONVINCE EVEN ONE OTHER PERSON TO JOIN US, OVER ONE BILLION PEOPLE WILL BE `ON BOARD` IN 30 DAYS. (Seriously. Grab a calculator and start doubling from 1.) For an e-copy, or to ask questions or volunteer, write me at alan_jacquemotte@yahoo... or P.O. Box 183393, Shelby Twp, MI 48318.

2008 Sep 18 07:21 PM