The Bailouts

Why Should We Care about The Bailouts?
Seems like a ridiculous question, but there are some that shrug off these monumental monetary infusion imitations as though they are not catastrophic. Others see them for what they are – the largest contributor to the now inevitable financial collapse of the American (and perhaps the world) economy. We may be able to stall, but we will not be able to eliminate the coming collapse of the worldwide monetary system. Bailouts will only make the situation worse by prolonging and adding to the magnitude of the overall problem.

What Are the Bailouts?
There were actually three different bailouts in 2008-2009 of 3 different types: a Stock Market bailout of $700 billion, an auto industry bailout of around $17 billion and a government stimulus package of nearly $1 trillion in 2009.

Stock Market Bailout of 2008
On or about September 16 2008, financial institutions in the US and Europe began to collapse. To mitigate this disaster, US Treasury Secretary Henry Paulson crafted an amazingly inept piece of legislation (actually nothing more than a few page letter) to Congress asking them to authorize the Treasury Department to spend a staggering $700 billion to “save the day”. There were to be no strings attached (he could spend the money any way he saw fit) and it was to be delivered in 2 stages (half down, the rest soon after). Polls were taken to test public support for this bailout and 95% of Americans opposed the “plan”. Congress and the Bush Administration ignored the people’s will and defiantly passed the legislation which handed over enough money to solve world hunger to the idiots and greedy shysters who caused the calamity in the first place (campaign donors, to be sure). In December, congress began to ask the various banks, insurance companies and financial institutions what exactly they had done with the money, and they refused to say. After spending half the bailout money, nothing had changed. The credit crisis was as bad as before and it fixed nothing. Where did the money go? Stay tuned.

The reason for the crash is often explained as an overexposure to
subprime loan securities. While there is some truth to any good lie, it is highly unlikely that this was the cause. It may have been one of the prime triggers, but it was not the underlying reason for the collapse.

Auto Industry Bailout
Fearing a political crisis from an impending unemployment increase, elected officials lent the US auto industry up to $17 billion to prevent them from going into bankruptcy. The irony of this situation is that it will do nothing to “save jobs”. The jobs will be lost anyway when the companies have to become solvent – labor is always the highest cost. Sure enough, layoffs were announced in January.

Obama Administration Stimulus Package
Trying to appear to do something, the Obama administration crafted a bailout plan of their own – a whopping trillion dollar package to stimulate the economy. Not having learned from history correctly, these economic amateurs attempted to apply Keynesian economics to alleviate the pain required of several decades of fiscal and monetary irresponsibility on the part of the US government. This of course only made matters worse. There’s nothing wrong with a government strategically applying Keynesian principles to targeted areas to forward specific plans in specific markets to further American interests. But to apply it across the board in a rather reckless manner is a recipe for more disaster.

Who’s To Blame?
For stock market investors, a favorite villain is speculation. For the auto industry, it is labor unions. For stimulus packages, it’s “big government”. Politicians like to say consumers are just not thrifty enough and have over-extended themselves by borrowing money to buy things they really cannot afford. And then there’s that old favorite, the business cycle. Mathematicians have even hopped on the blame bandwagon citing chaos theory. As long as we can define an “enemy” and the enemy isn’t us (or more precisely, those we’ve put in power over us), then all is normal. All of these miss the mark by a mile. So who is to blame? The answer is threefold: fractional reserve banking, fiat money creation and good old-fashioned government corruption. In recent years, increasing the money supply by fiat (governments legally counterfeiting money) has gone out of favor, partially because the economic results are so quick in terms of inflation. In other words, businesses have gotten wise to that game. So the US government turned instead to reserve rate reduction policies to have the banks print money for them (the result is the same – an artificial increase in the money supply). Only this time, the plan didn’t work. With fed rates at or near zero, banks still wouldn’t loan money, not even to each other! Why not? Well the cat is out of the bag. All the banks in the world know exactly what’s going on – they just don’t want us to know. This is understandable – the bottom line is that none of the banks in the world actually hold their depositor’s money anymore. It’s simply NOT THERE. And it’s backed by nothing! The most likely cause of the meltdown was that some very big investors (say in China or Saudi Arabia) demanded a large portion of their US reserves and the banks panicked. [Note to self: This tactic can be used again in the future to force a financial collapse of an enemy state.] The basic problem is that all of the financial institutions in the world have become so over-leveraged that they can no longer meet the demand reserves required. Fractional reserve banking has failed.

Why is this Inevitable?
Okay, we can see how this Ponzi scheme works, but it has worked for a pretty long time so far. Why can’t we just fix it a little bit and then move on? As long as we all agree not to make a run on the banks, things can return to “normal”, right? That is the song those in power are singing right now. The problem is – the enormous amount of debt the USA has amassed and will continue to in the future. Once cash is actually needed to pay for say Social Security or Medicare, a run on the banks will ensue and all the cards will come crashing down. Further, enemy states that run surpluses instead of deficits due to foolish American “free trade” agreements can also ask for their cash, causing another type of bank run.

What Now?
If you think about it for a while, you will see that there really is only one solution to this problem – a worldwide currency “adjustment”. Like many things in economics – in the final analysis it boils down to common sense. In this case, there is no value in something that doesn’t exist. While a currency collapse sounds a bit scary on the surface, it doesn’t have to be as bad as it could be if it is handled in a coordinated manner. One approach would be for all the banks of the world to begin moving away from a fractional reserve banking system by increasing the reserve requirements over time until they reach 100%. Unfortunately, it is a practical certainly that someone would not cooperate in this plan and it would unravel due to public pressure from special interests. If instead we go “cold turkey”, the US might have to play isolationist policies for a few years until we get our act together following the plan outline here.