Friday, September 19, 2008

One trillion dollars and counting


The federal government already has pledged more than $600 billion in the past year to bail out, or help bail out, some of the biggest names in American finance. That includes the rescue of investment bank Bear Stearns in March, the takeover of mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) earlier this month and the takeover of the world's largest insurance company, American International Group, just this week.

And the story explains today's proposed bailout:

Struggling to stave off financial catastrophe, the Bush administration on Friday laid out a radical bailout plan with a jawdropping price tag - a takeover of a half-trillion dollars or more in worthless mortgages and other bad debt held by tottering institutions.

So that's a trillion or so dollars, give or take. NBD.

Btw, anybody happen to know the source of the money?

Best I can tell, it's simply being printed (or promised) by the Bernanke / Paulson duo.

And what happens when they "turn on the presses?"

Weimar Germany had a little experiment with the concept of hyperinflation.

From Wikipedia:

The main cause of hyperinflation is a massive and rapid increase in the amount of money, which is not supported by growth in the output of goods and services. This results in an imbalance between the supply and demand for the money (including currency and bank deposits), accompanied by a complete loss of confidence in the money, similar to a bank run. Enactment of legal tender laws and price controls to prevent discounting the value of paper money relative to gold, silver, hard currency, or commodities, fails to force acceptance of a paper money which lacks intrinsic value. If the entity responsible for printing a currency promotes excessive money printing, with other factors contributing a reinforcing effect, hyperinflation usually continues.

And this is precisely the reason that I agree with Ron Paul on a return to a gold standard (or some sort of commodity-backed currency). Though I'm undecided on his call to eliminate the central bank.

I think I may actually write Senators Chris Dodd and Joe Lieberman and Congressman Chris Murphy this weekend to tell them that their support of a bailout with my tax dollars is totally unacceptable. Although Murphy is really the only one to which the comment is relevant, since I'm already a believer that Dodd and Lieberman have been around too long and simply need to go.

To say I'm disgusted is to put it mildly.

Tim White


Anonymous said...

George Bush has done more damage to this country than all the terrorists in the world.

Anonymous said...

anything Bush did would have been done even more quickly by the Democrats in Washington.

If Chris Dodd is the top banking mind in the US Senate, my suggestion is you'd best put your cash under a Posturepedic

Anonymous said...

Your Wikipedia quote was true pre-1980. It is no longer true at all. There has been a disconnect between the amount of $$$ (broadly defined) in this country and the inflation rate. Greenspan called the disconnect a "conundrum".

Letting the banks fail will cause a massive disaster not seen since 1929 - 1935. While I don't like bailing out banks who took ridiculous risks with $$$, the alternative is much worse for us all.

tim white said...

pain now or pain later.

IMO, Washington DC is rolling the dice... believing that the short term risk (a trillion dollar "loan") will provide the short term liquidity that the markets need. In turn, the markets will return to take care of the long-term.

I question whether the short term liquidity will "fix" the root cause.

IMO, the root cause is not short-selling and bad loans. The root cause is monetary policy based on a fiat currency.

We left the gold standard officially in the 1970s. IMO, the lack of a commodity-backed currency has been masked for 35 years by the petrodollar (all world trading of oil done in USD).

As I understand it, the petrodollar is disappearing and many other events are taking place, such as the rise in wealth of developing nations. With the rise in their wealth, why should China and other rely exclusively on the US Dollar that has known long term liabilities that make America insolvent (though other developed nations are just as bad)?

To me, the issue is simple. You peg the dollar to a commodity (metals are easiest) and you remove the ability of the central bank (The Fed) to print money, change rates, or whatever they do.

It may seem very antiquated, but then the Constitution must be antiquated.

Don't get me wrong, I recognize the problem is complicated. But as I understand history, I fall in the Jefferson / Jackson / Paul school of thought... not the Hamilton / Bernanke school of thought.

And in many ways, monetary policy exists in a zero-sum context. Again, pain now or pain later?

tim white said...

I'm not above compromise though.

For instance, if:

the legislation included a (long term) return to the gold standard and

there were assurances that anyone who broke even the smallest of laws was going to be prosecuted...

then I would consider supporting the bailouts.

But if the CEOs of Fannie / Freddie really get those massive payouts...

No. I wouldn't even consider supporting the bailout for one second.

tim white said...

The bums in Washington need to go.

tim white said...

And here's another thought...

The Fannie / Freddie bailout happened because China (and others) started pulling their loans to the US (via sale of "US treasuries" I presume??)

Now let's say the Fed prints the money on Monday and returns liquidity to the market.

Then over the next few weeks, China (and others) remain bearish on the US Dollar and continue selling their treasuries?

Does the US Dollar go into free fall? It could. But by supporting this trillion dollar bailout, the US is in that much worse shape... and the US will almost certainly turn on the presses since they've already demonstrated how irresponsible they are.

Of course, this is simply reading the tea leaves. I don't know what will happen. But if the pain is to be felt... I normally prefer pain now, rather than pain later.

Anonymous said...

I think Tim the decision was made that we would rather revisit the 1970's than the 1930's. Evidently Bernake was convinced the commercial paper market was on the verge of seizing up within days; due to money market withdrawals.

I expect disco music to make a comeback along with double digit inflation. Still got a leisure suit?

Anonymous said...

There's plenty of blame to go around. Bush is no fiscal conservative, but Pres. Clinton signed the repeal of the Glass-Steagall Act, allowing much deregulation and riskier investments by banks.

In the shortrun, they've got to bail out the banks to avoid a fullscale 1929-style collapse. But the feds should put them under strict receivership, fire the CEO's/CFO's who got us into this mess, and bail out the depositers and pension funds, NOT the shareholders and executives.

In the longrun, I agree with Tim, we've got to get back to hard currency and away from fiat money.

tim white said...

For instance, if:

the legislation included a (long term) return to the gold standard and

there were assurances that anyone who broke even the smallest of laws was going to be prosecuted...

then I would consider supporting the bailouts.

Add "transparency at the Fed" to my list of requests for a compromise bill.

Anonymous said...

The US will not really start to recover until the buffoon in the White House is gone.

It's been nothing but 8 years of blunders, and he can't blame God for any of it.

tim white said...

Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said in an interview that his staff had already begun working with the Senate banking committee to draft additions to the administration’s proposal.

Mr. Frank said Democrats were particularly intent on limiting the huge pay packages for corporate executives whose firms seek aid under the new plan, raising the prospect of a contentious battle with the White House.

I see no logical reason for the White House to fight Barney on this... unless it's a matter of people in the White House representing Wall Street, not Main Street.

According to Wikipedia, Paulson is a former CEO of Goldman Sachs and his estimated net worth (presumably pre-meltdown) was $700 million.

Paulson seems to be the only person involved here who understands the significance of the situation. But he's also so far removed from being independent. I mean, if our 401Ks have tanked (I only check my quarterly statement, so have no idea), he's probably lost hundreds of millions of dollars so far.

In fairness though, if Ron Paul's not running the show... I'm much happier with Paulson running it... than say Bush or Dodd... both of whom seem to be completely lost on this - Bush is silent and Dodd blames Bush, both basically useless in this situation.

Anonymous said...

Agreed, Paulson at least seems worried about the practical implications of all this, and is not trying to find political cover for his derriere.

By the way, the buffoon in the White House did halfheartedly propose dealing with this years ago. But's its been the story of the past few years. Abysmal execution by the administrationof even their good ideas coupled with craven opportunism and fiscal insanity on Capitol Hill.

If there ends up being a perp walk on this one, the line is going to look like the Long March

Anonymous said...

Abysmal execution by the administrationof

Well we found out what a compassionate conservative does. Nothing conservative and nothing compassionate.

This man has spent his entire administration on tax cuts for the rich, giveaways ot special interests, denying the fact of global warming, fighting with anyone with a different point of view, coverups, revenge, fighting health care, appoinment of unqualifide indivuals to important jobs, appoinment of industry lobbiests to administer the agencies the very agencies that they were loobying, meeting the demands of the religious right, fighting any need for abortion, denying not only women of this country of contraceptives, but not allowing any family planning in other countriesthat recieved U.S aid. His decisions against family planning and condoms has resulted in maybe millions of more people getting aids and countless more dying. And, the list goes on and on.

This man just never focused on the real problems of the war, the environment, the economy or of serving all Americans.

It's been a sad 8 years for most Americans.

Anonymous said...

He fooled us twice. We are to blame. Make sure we listen to both candidates and vote in Nov. Let's hope for a better future for our children and grandchildren.