Monday, September 29, 2008

Everybody Hates the Bailout !

It has been very difficult, almost impossible, to find anyone willing to go on the record as approving the soon-to-be-implemented bailout by the Fed and the U.S. Treasury of the U.S. and world economy. So I will.

People seem to think that this is a Wall Street bailout, a life preserver thrown to rich guys who caused all the trouble in the first place. I think there will be plenty of time for recriminations once the smoke has cleared. But meanwhile I want to emphatically make the following point.
If Wall Street and the global banks fail, so will your local bank and your money market fund where you think you have your savings safely squirreled away for a rainy day and your retirement. NO ONE will escape the ruin that would follow from a rash of bank failures in the current climate. Worse, once the banks fail the economy would grind to a halt and unemployment would skyrocket - a true Great Depression scenario. Not only would you lose your all your savings, you would lose your job too!
Ben Bernanke, the man who, along with Henry Paulson, is trying to stave off disaster, is an expert on the failures of fiscal and monetary policy during the great depression. That depression occurred precisely because taxes were raised by congress and the money supply was allowed to fall by the Fed when the banking system started to fall apart. The slogan then was "let the free market do its work and clean out all the dead wood and speculators and risk takers- don't bail them out - don't print money or run a fiscal deficit". Sound familiar?
So the free market did its work, pushed by Congress and the Fed. The result was a 10 year depression and 25% unemployment.
Is that what people want to happen now? It seems so because such a repeat of the Great Depression is precisely what will be in store for us if Bernanke's and Paulson's efforts are thwarted and financial institutions allowed to fail. If you don't believe me look what happened when Lehman Brothers was allowed to slide into bankruptcy. A run on money market funds, for one thing. A near collapse of Goldman Sachs, the best managed investment bank in the world for another. Do you think your bank will be far behind if Goldman were to fail, if Citibank were to fail?
Let's get real, folks. This crisis has hurt a lot of people, but if we want to get through it without even more pain and suffering the Bernanke-Paulson plan is the only game in town.


Anonymous said...

For it!

Anonymous said...

Hi Carl,

Great article. But sadly, I think you're preaching to the choir. The average American needs to read this, but that's not gonna happen.

As I mentioned in a comment a few days ago, this is an inherent problem of democracy. A true democracy is nothing other than mob rule, every idiot who knows nothing about the complexities of government and economics gets a vote, gets to say what should happen.

Fortunately our country is still a republic, but when the mob is screaming a loud and clear NO, what's an elected official to do? Do they go against their constituency and do the right thing for the country (AND for the mob), or do they cave in and vote as the mob would have them vote? Let's pray they all have the courage to do what's best for the country AND for their voters.


Anonymous said...

I agree with you Carl. Any doubters should read America's Great Depression by Murray Rothbard. It meticulously chronicles the ruinous government policies from an economic standpoint. Hearing Hillary Clinton say last week that we need a government program like the great depression sent shivers up my spine. -- Jeff

Anonymous said...

Mr. Futia:
My Congressman, Darrell Issa, does not agree. The following is his proposal of this past weekend.
Dr.Sam Mikolaski


(Mast: Darrell Issa congressional letterhead)

Let Private Investors Fund Wall Street Rescue Fund Through Guaranteed Recovery Bonds

• Congress authorizes the Treasury to issue up to $700 billion dollars in unique callable TBills (Guaranteed Recovery Bonds) to create a Rescue Fund managed by Treasury. Private investors who purchased the Recovery Bonds would provide the capital for the Rescue Fund. Financial institutions borrow from the fund at a rate that fully covers the interest paid to investors in the Recovery Bonds plus an insurance premium to protect taxpayers.

• Financial institutions holding at-risk mortgage-backed securities would be able to borrow from the Rescue Fund at the T-Bill rate plus 200 basis points (a 2% insurance premium). Treasury would retain the 2% premium to protect taxpayers against defaults.

• Treasury would set a borrowing limit for each institution based upon Secretary Paulson's mark-to-market to maturity valuation of the mortgage backed securities they hold.

• Financial institutions would continue to hold their pledged securities and be responsible for liquidating them over time, so taxpayers would not be saddled with the liability or cost of disposing of troubled assets.

• With Treasury approval, troubled securities and obligations to the Rescue Fund would be transferable to allow for the purchase and sale of the associated assets and liabilities.

• Financial institutions would have access to the cash they need and an incentive to pay the funds back as soon as possible.

• As financial institutions pay back their loans, Treasury will pay-off (call) the Guaranteed Recovery Bonds.

Anonymous said...

Yes, we need a bailout, but what happens after that? It will still be sluggish at best. We're avoiding a meltdown, but that is still far from good times. If the US can mess up like this, what then of China?

Nick J.
Miami FL

Anonymous said...

Carl, what do you know about whether or not bailout is good for main street, so keep your opinion to yourself

Anonymous said...

Please let me know if you ever decide to run for congress because you'll get my vote. Well reasoned and said!

Anonymous said...

John Hussman makes some good points.

mojave said...

Some may feel "joe public" is too stupid to understand the crisis; I often feel that way, but I think in this case Joe understands the issues DO NEED to be addressed. He just doesn't understand why this SINGLE plan is shoved down our throats in an EMERGENCY fashion. Other plans HAVE been proposed from 'leading' economists and financial bloggers. Nobody desires a global financial meltdown, but we've learned to NOT TRUST the current methods forced on us. My 2c.

Duncan B said...

In response to the person complaining about carl expressing his opinion: It's called ... it's Carl's blog ... where he expresses his opinions..... duhh!

You don't have to read it!

Anonymous said...


U are very right on this.It is the only plausible plan on the ground.

Thanks for your insightful blog.

jackn3 said...

I disagree. This bailout was nothing more than a step toward socialism. Not only that, but the 700 billion is like spitting in the ocean when it comes to the 60 trillion of credit swaps that will unwind in thwe next year or so. I pity people who have a lot of debt.

Anonymous said...

Government caused this problem - why should we trust them to fix it?

Nobody is talking about raising taxes or cutting the money supply - neither of those will happen.

Glad to see the bailout fail (in its current form). Rather than have the government overpay for these assets (ruining price discovery), let the government just buy unlimited equity stakes in the financial companies (much closer to a free market solution).

Anonymous said...

It's a shame that the initial Paulson plan was so pathetic. I think that's the reason it failed.

The incompetency of the Bush administration is nothing short of amazing.