On Sep 29, 2008, at 12:04 PM, Stephen A. Lawrence wrote:
Stockholders have just voted. The bailout was extremely important to
the financial health of the country, or so they apparently believe.
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NEWS ALERT
from The Wall Street Journal
Sept. 29, 2008
The Dow Jones Industrial Average plunged more than 500 points as the
the
final votes were tallied in the bailout vote in the House and the bill
appeared short of the votes needed to pass. The package, which would
have marked the most dramatic federal intervention in the financial
markets since the Great Depression, was finalized Sunday after days of
exhaustive negotiations between lawmakers and the White House.
Consider this, the administration that caused this and other
corruptions used the fear of collapse in order to get the bailout
passed. Their fear campaign failed but they can't now turn the fear
off. Everyone is now sure the whole system will collapse, which it
will thanks to how this administration has done its job. On the other
hand, many people have good reason to believe that the $700B bailout
was not the proper approach (note below). A better approach would
have been to consider various other methods to solve the problem.
These other methods were not considered and now have to be fought out
in Congress, where logic is not commonly used. Eventually, some
variation on the bailout will emerge, but not until many more people
have lost their savings and their job.
Ed
Cash for Trash
By Bill Bonner
"Bankruptcy of Neo-Capitalism," shouted a headline in Wednesday's
Paris press. Scarcely since Hitler blew his brains out has the type
been bigger or the contentment broader.
Almost everyone everywhere is enjoying the show. Each headline brings
more laughs. The financial markets give people neither what they
expect nor what they want, but what they deserve. What a treat to see
people getting it – good and hard.
Near to home, that galling "millionaire next door" – many will take
pleasure in seeing his portfolio of stocks marked down. "Stocks for
the long run," he used to say, smugly; the silly old coot will be dead
before his stocks come back! He'll have to work until he drops dead,
just like the rest of us.
On Wall Street, the masters of the universe – who had the pay slips to
prove it! – are now getting blown up by their own debt bombs. The top
five firms on Wall Street were thought to be "too big to fail." But
Bear Stearns has been blown to smithereens. Lehman is exploding into
small pieces. Merrill ducked and missed the blast. Then, the last big
capitalist desperadoes – J.P. Morgan and Goldman – waved the white
flag. They petitioned the government to allow them to become
regulated, deposit taking banks!
And George Bush will leave behind the biggest nationalization program
in history. Surely, that's worth a snide chuckle. The takeover of
Fannie and Freddie alone leaves half the country living in what are
effectively, government-subsidized housing projects. Meanwhile, the
coordinated takeover of Wall Street, put together by his apparatchiks,
left even the hardened lefties at France's Liberation in shock and
awe: "This enormous statist intervention...is the work of the most
ideological and extremist administration that the US has ever had."
How heartwarming to see that the meddlers and world-improvers get a
second wind. It's like driving around in a '33 Lincoln...or throwing
rocks at the gendarmes in '68. The old, gray Bolshies feel young
again! Impetuous! Brainless!
And every capitalist is behind the bail out program too. All over the
world, markets are out – state-sponsored meddling is in. Free market
principles are fine – until prices start going down!
And there's the breathtaking chutzpah of it! After proposing a $700
billion program, in which the government buys up Wall Street's
mistakes – otherwise known as "cash for trash" – Henry Paulson says he
had no choice: "We did this to protect the taxpayer," said the former
Goldman chief.
Even Russia got into the act. New to counterfeit capitalism, it's
getting the hang of it fast, pledging $20 billion in the fight to keep
stock prices from falling to what they are really worth.
Then, not be left behind in general hysterical absurdity, SEC honcho
Christopher Cox announced a list of 799 financial stocks on which
shorting is banned until Oct. 2nd. In Britain, the FSA's ban on
shorting financial shares lasts until Jan 16. But Pakistan gets the
King Canute Memorial Prize; by law in that benighted land, stocks
can't go below their August 27th close.
And what a bunch of numbskulls – Greenspan, Paulson and Bernanke!
Every word they've said so far has been financial poison. "Greenspan
relaxed about house prices..." reported the Financial Times in 2005.
"Most negatives in housing are probably behind us..." said the same
sage in October 2006. "We believe the effect of the troubles in the
subprime sector...will be likely limited..." said Bernanke in March
2007. It's "not a serious problem...I think it's going to be largely
contained," added Paulson in April 2007.
But these are the same numbskulls who now say they are saving
capitalism from itself. Ah, there's the rub...amid all this giddy
merriment is a serious threat. The feds have bailed out the bankers,
the insurers, the mortgage lenders, and half of Wall Street. But who
will bail out the feds?
Since 1971, the world's money system rests on the dollar. And the
dollar rests on nothing but faith, hope and the kindness of strangers.
And while the full faith and credit of the United States of America is
elastic, it can snap.
Last week, the price of gold popped up $120 in two days. Then, on
Monday, it added another $43. Oil gushed up 44% in the space of barely
a week. Investors felt the geyser of liquidity coming from Washington
and beat a retreat from the dollar.
For the last 15 years, the U.S. money supply has grown about twice as
fast as GDP. Federal government liabilities, meanwhile, have grown
three times as fast. As a result, the USA now has more financial
obligations than assets. It is, effectively, broke. Nevertheless, the
debit side of its ledgers grow heavier and heavier. This year's US
government deficit will add about half a trillion. The US trade
deficit is about $700 billion. The U.S. bailout plan will probably
cost at least $1 trillion more.
Where will the government get that kind of money? There are only two
possibilities – one honest and depressing, the other corrupt and
alarming. Whether it borrows the money, or prints it up, the world
enjoys no net increase in financial resources. Borrowing takes
resources from projects that might have been worthwhile and diverts
them to the losers. Interest rates rise, as a consequence of the extra
borrowing; higher rates generally worsen the economic picture. And
while the U.S. borrows, long term, at almost 5%, it lends at barely
2%. It's like a bank that has gotten its business model badly mixed
up. The more it borrows and lends, the faster it goes broke.
If, on the other hand, it merely prints the money – or if it creates
it "out of thin air," to use Lord Keynes' handy phrase – the results
are even worse. Inflating the money supply with new currency, a la
Argentina or Zimbabwe, wipes out debts. But it destroys faith in the
dollar and brings down the whole world's money system.
Sooner or later, this is just what will probably happen. Not because
capitalism doesn't work – but because it does. Capitalism is doing
just what it should do – it is separating fools from their money. But
the fools vote. After a big bubble, there are more fools than
sages...and, in the United States of America, more debtors than
creditors. Sooner or later, Americans will realize that they are
better off destroying their own money than preserving it...and that
they would prefer to stiff their creditors rather than pay their
bills. That is when deflation will gives way to inflation...and the
world's post-'71 dollar-based money system comes to an end.
[Joel's note: Bill Bonner is the founder and editor of The Daily
Reckoning . He is also the author, with Addison Wiggin, of the
national best sellers Financial Reckoning Day: Surviving the Soft
Depression of the 21st Century and Empire of Debt: The Rise of an Epic
Financial Crisis .
Bill's latest book, Mobs, Messiahs and Markets: Surviving the Public
Spectacle in Finance and Politics, written with co-author Lila Rajiva,
is available now by clicking Here:Mobs, Messiahs and Markets
