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Congress Has Sold Us Out to the Big Banks

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Ronald Reagan said, “Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it”.

Even before Bush’s Big Bank Bailout Bill was passed by Congress we were in the “subsidize it” phase of the cycle. We have been told by our “leaders” that more subsidizing through the bailout legislation is in the best interest of the millions of Americans in the middle class. It was done to preserve our savings accounts, education and retirement funds and to help small business in securing the necessary loans they need to survive. It was done to rescue us from economic calamity.

In fact, the $700 billion bailout (ignoring the pork and tax breaks which make the legislation worth more than $800 billion) will only do harm to the middle class. First of all, this $700 billion dollars is in addition to nearly $1 trillion that the Federal Reserve has already pumped into the economy in just the last month. Secondly, where will the Treasury get the money called for in the bailout package? Answer: it will borrow the money from the banks. But, I thought the banks had no money, hence the need for the bailout. They don’t, so they will create the money through a system called fractional reserve. In addition, because the banks are a cartel headed by the Federal Reserve they can also fire up the printing press to produce dollars. The banks will loan these new dollars to us, with interest, so we can then give the money back to them. The nearly $1 trillion already pumped into the economy by the Fed and the new funds called for by the bailout package are an artificial increase in dollars. Of course, the banks will get to use the new money first before inflation sets in and then the rest of us can borrow the money back (again) from banks at higher rates because of the inflation. The banks can’t lose. If you think this is a good deal for middle class Americans then you probably own one of the subprime mortgages that got us into this mess in the first place.

In addition to the government using our money to get us into an insane financial arrangement with the banking industry, the bailout will not solve our economic problems and indeed will eventually make them worse. How does throwing borrowed money at bad assets make any sense? It is equivalent to borrowing money and then flushing it down the toilet. If the bad loans that the bailout is going to purchase had any value they would have been bought on the open market at some price. They have not been bought so it is safe to assume that they lack any value. Consequently, the bailout will simply relieve the banks of the ramifications of their bad behavior and leave taxpayers holding a bag of worthless assets.

When the Treasury writes off these assets, the loss to the federal treasury will be well over a trillion dollars (this includes bureaucratic costs, opportunity costs and interest costs on the $700 billion). Folks, Uncle Sam already owes over $9 trillion dollars with at least another $50 trillion of future obligations through entitlements. It is only a matter of time before these debt obligations have to be met. Because foreigners will be unwilling to lend us any more money and the Federal Reserve will be unable to print more because of hyperinflation, the politicians will have to raise taxes. High taxes in recessionary times will be the death knell for our economy.

And don’t think that future misallocations of resources won’t be encouraged by this federal largess. It has already begun to happen. Bank of America probably bought Merrill Lynch with its bad assets to ensure that it was “too big to fail”. Citigroup and Wells Fargo will fight to the death for the right to buy Wachovia and its $74 billion of bad assets because they both know that the Treasury will now offload those bad assets onto the taxpayer. Once these bad assets are removed from the balance sheets of the banks what guarantees are there that they won’t turn around and make more high risk, bad loans? Aren’t the banks still under the federal mandate through the Community Reinvestment Act to make loans to high risk debtors? By passing the bailout package hasn’t Congress shown that it will be there for the banks when they fail?

The bailout package will prove to be harmful for the middle class. It will cause inflation, burden taxpayers with hundreds of billions of dollars in bad assets, and encourage irresponsible economic decisions. Someone also once said, “the more you subsidize something, you more you get of it”. By subsidizing the bad decisions of Wall Street we can only expect more of the same bad decisions.

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About Kenn Jacobine

  • Some good points, Kenn. But the fact is that the assets in question DO have value. When they go up for sale tomorrow they will likely sell for at least 50 cents on the dollar and probably substantially more. And if you want to keep the outrage going, you can be outraged that those same banks will be using our money to buy those assets, and likely making a profit in the process.


  • bliffle

    The government is going to buy assets today at higher than market value? Figuring they’ll go up tomorrow?

    Where do I signup? I’ve got some assets I expect to go up in the future. Where do I signup to sell them NOW to the government at above market? At the very least, I could just buy some more assets at market value, then sell them at above market to the government!

    Sounds like an infinite money machine to me.

    You’re brilliant, Dave.

  • Bliff, the market value is going to be set at auction when the various banks bid on the assets. There is no market value for anything untilsomeone is willing to pay for it.

    And no one wants to bid on your Che t-shirt and birkenstocks.


  • Cannonshop

    Here’s the roll call vote on the bailout. It might be educational to cross-reference the “Yeas” and “Nays” by where they’re getting the campaign contributions, and how deeply they’re in hock to their parties.

  • troll

    Cannonshop…already been done over at opensecrets – in the aggregate at least

  • Cannonshop

    Thanks, Troll.

  • Gee… I still don’t understand buying BAD debt, but maybe it’s because I would never do it. How much lower does the housing market have to get? Here in Michigan, home sales are up in Detroit. That’s right, 30% up from same time last year. Of course, you can buy a house there for $500. It’s mostly speculators and flippers. Maybe when the rest of the country falls in line, someone will take this seriously.

  • Cannonshop

    They’re buying the BAD debt with tax dollars so that the gravy train injections to Congress continue.

  • bliffle

    I heard a report that 6million mortgage forfeitures are expected next year.

    Well, who cares. Good thing none of that 700billion is going to actual mortgage holders. Wouldn’t want to interrupt the course of the US economy as it goes in the tank.

    This is just like ENRON, where they were paying out $500million in “Retention Bonuses” as they were going bankrupt.

  • Baronius

    Very good analysis, Kenn. I don’t think things will get quite as dire as you do, and here’s hoping that I’m right. As for Cannonshop and Troll’s point about the financial motivations for those who voted for the package, I don’t really care. They could have done it for the campaign money, or because of the pressure, or because they thought it was a good idea. Whatever the reason, I’m going to remember how my congressman voted.

  • Heloise

    You heard it hear heloise-speak called the bailout a “scam.” Now bloggers and experts are calling it a “scam.”

    Even before I heard the case really. Why? Because Paulson “the 900 million-dollar man” appointed by Bush put the bill on the table–duh.

    Why the fuck do we want to let ourselves get screwed by Bush at the 11th hour? yes, we needed to do something, but not give away the banksssss.

    60 minutes trumpeted doom and gloom about the world’s economy by stating that the “dark markets” are not under any control and are really a black hole waiting to happen (my words) because they are like 700 TRILLION-dollars-wide and deep. That means our puny 700 billion or even 1 trillion will get swallowed up and never seen again.

    What say you Congress? Can we get YOUR deal undone?

    Cramer is crazy! He’s practically jerking off in public with his statement telling people “to SELL if you need the money within the next five years.” What a panicked fool. Yes, it’s officially the “stink market” coined by Heloise.

  • zingzing

    heloise, you are so weird. what you say may be true, but the way you put it… you don’t talk like that, do you?

  • DiannaD

    THE LION [Wall Street Executives] went once a-hunting along with the Fox, the Jackal, and the Wolf. They hunted and they hunted till at last they surprised a Stag, and soon took its life. Then came the question how the spoil should be divided. “Quarter me this Stag,” roared the Lion; so the other animals skinned it and cut it into four parts. Then the Lion took his stand in front of the carcass and pronounced judgment: “The first quarter is for me in my capacity as King of Beasts; the second is mine as arbiter; another share comes to me for my part in the chase; and as for the fourth quarter, well, as for that, I should like to see which of you will dare to lay a paw upon it.” 1 “Hump,” grumbled the others [the taxpayers] as they walked away with their tails between their legs; but they spoke in a low growl…

  • bliffle

    This is interesting:

    OpenCongress – bailout

    Wall Street vs. Main Street
    October 4, 2008 – by Donny Shaw

    Here are the five Members of Congress who, on Friday, voted in favor of the financial bailout bill and then minutes later voted against H.R.6867, a bill to extend unemployment insurance benefits for people struggling in the nation’s slumping economy:

    Rep. James Barrett [R, SC-3]
    Rep. Christopher Cannon [R, UT-3]
    Rep. K. Michael Conaway [R, TX-11]
    Rep. Bob Inglis [R, SC-4]
    Rep. John Shadegg [R, AZ-3]

  • DiannaD

    Unemployment insurance benefits for people struggling in the nation’s slumping economy may not be necessary…

    Work in California
    Good Wages.
    Tents and Cabins Furnished Free.
    Store on Camp Ground.
    Busy From October to February.
    Bill Macey, Labor Contractor

    — From: The Grapes of Wrath by John Steinbeck

  • I just thought I’d mention that on Desicritics, C.R. Sridhar has written an excellent article dealing with all this.

    It was republished at the Monthly Review, an electronic magazine.

    I think it is worth a look.

  • bliffle

    Bush rejected the Unemployment Extension saying that it would encourage workers to delay getting jobs.

    What jobs?

    What terms were put in the trillion dollar bailout to discourage bankers from bungling and cheating as in the past?

    Fair’s fair.

  • bliffle

    Sorry Dave, you’re wrong again. I never owned Birkestocks (tho I had a nice pair of Joseph Siebels that I wore out) and I never owned a t-shirt with anything more inflammatory than an Open Space logo.

    However, I did hear an interview with the photog who took the famous Che picture, and he said that Che was peeking out between the curtains before a speech. That’s what gave that famous far-seeing look: he was counting the house!

  • troll

    so…is this it for GM or can it withstand today’s loss of capital – ?

    and how ’bout those Asian markets

  • bliffle

    At first McCains plan sounds good, but it’s a bit of an illusion because what he’s really going to do is bailout local lenders, NOT homeowners. This is even worse than the original Bernanke/Paulson plan which indemnified banking at the top without taking equity positions. The best plan appears to be the Gordon Brown (UK) plan (Elmendorf plan) which trades loans for equity, like a normal bailout whether by government or business. This is the plan that it looks like Paulson is morphing into. In fact, it looks like any nation confronted with meltdown is advisd to follow.

    Several (real) economists have written in detail about this.

  • bliffle

    troll asks:

    “so…is this it for GM or can it withstand today’s loss of capital – ?”

    It’s a loss of cap-value, not capital (asset value).

    GMs destiny is to go out of business. That’s because it has been so managed for 30 years. I don’t know if that was the plan, but that is the trajectory. About 5 years ago I put together a get-rich-quick scheme to make $50billion with $12billion of borrowed money by taking over GM and liquidating it. Of course, the employees, retirees and vendors would be slaughtered, but that’s Major League Baseball.

    The big surprise losers would be vendors, to the tune of $140billion, because GM had such a successful vendor-banking program going.

  • troll

    It’s a loss of cap-value, not capital (asset value).

    quite correct bliffle – I should have said ‘capitalization’…

  • troll

    ‘as goes GM so goes the Nation’ – ?

  • bliffle

    Not at all, troll: GM continued making trucks in Europe for Germany through WW2, thus aiding the Nazis, and we still won the war.

  • bliffle

    Everyone in government has sold us out to the banks. Even the new guys. You have to look around hard to find anyone who has fought against the pillaging of the US treasury and the futures of Americans by unscrupulous bankers. And that includes the new people in the Obama administration.

    Here’s an interesting article:

    Scam city

    As a white-collar criminologist and former financial regulator much of my research studies what causes financial markets to become profoundly dysfunctional. The FBI has been warning of an “epidemic” of mortgage fraud since September 2004. It also reports that lenders initiated 80% of these frauds.1 When the person that controls a seemingly legitimate business or government agency uses it as a “weapon” to defraud we categorize it as a “control fraud” (“The Organization as ‘Weapon’ in White Collar Crime.” Wheeler & Rothman 1982; The Best Way to Rob a Bank is to Own One. Black 2005).

  • STM

    Problem is, they HAD to do it, because if they didn’t, the entire global economy would have collapsed in an instant.

    You don’t think governments actually enjoy handing over their (your) hard-earned to prop up private enterprise, do you?

    They’d much rather they didn’t have to.

    The only people who’ve sold you out are the idiots who caused this crisis in the first place, and they live(d) on Wall Street in New York and in the gilded streets of the City of London.

  • The question is: Where is Dave Nalle when you need him?

  • In an instant, Stan? The entire global economy depends on GM and AIG? Look up the stats. AIG is a big company, but there are many bigger and if it disappeared today there would be nary a ripple in the market. In fact, I’d bet the market would go up if AIG went down once and for all.


  • Dave, Do check in on the other thread, please. This guy, name Turbo, has a question about BC.

  • May be not in an instant, Dave, but it was more than a ripple. Broke 7000 level today because of that. And its free falling.

  • STM

    Dave: Not true. AIG had huge exposure to toxic debt, mainly through Wall Street’s idiot credit default swaps concept and the mortgage-backed assets house of cards that was collaterailised debt obligations (CDOs).

    That means the tentacles reach through to many other places, right across the world. This toxic debt is multiplied a million-fold.

    With respect, sometimes when I hear Americans saying these things, I worry that they don’t understand the real nature of this crisis and how serious the issue of toxic debt really is, and how it just won’t go away by letting companies fall on their arses.

    The domino effect of such collapses would be profound across global financial markets that are already struggling.

    Simply, the collapse of AIG would have been an absolute disaster for the global economy.

    The US government did nothing of note at the start of the Great Depression, and you know the result. At least this time it’s had a go – and all governments have had to tread a similar path, armed with the lessons of history, and they’re following the advice of people who probably know a lot better than you or I.

  • AIG.

  • Well, it’s the Yankee denial, STM. We can do no wrong.

  • STM

    Also, economies depend just as much on “little people”, workers with jobs, spending their pay packets and keeping that money going around.

    It’s even down to really simple stuff, like buying your lunch or a morning coffee at a diner instead of taking a sandwich, because even that small amount of spending keeps another half-dozen people in work. Take a sandwich too a couple of days a week, because that helps the breadmakers and the pork industry, but you get my drift, right?

    You see it in small communities: one set of jobs go, at a factory, say, and then all the others around it start to go.

    The government here has been handing out fistfuls of cash to families to encourage them to keep spending, and it’s led to substantial retail sales growth over December and January, which is the key to all this: growth, rather than decline.

    They’ve been handing out up to $21,000 to first home-buyers, and the mortgage market is now booming, which will spin off into the building industry. That kind of stimulus is the type of thing that’s also being done with infrastructure both here and in Europe and the US.

    In the case of GM, say, it’s many thousands of jobs around the world that are at risk – although GM Holden in Oz, like Ford Australia, has been a very profitable operation.

    The US no longer exists in a vacuum and what affects you there affects everywhere else, and vice-versa. This is the frightening thing about this crisis.

    However, as I’m not lining in the US, I can only speak from our situation regarding jobs. Should those two companies start shedding jobs in a big way, that would be a disaster.

    Every company that goes under is also no longer contributing its tax dollars to the government’s coffers, along with the taxes of its employees, and that’s bad too.

    You just can’t run a country without ’em.