The Fallacy of the Bailout


Morgan Brown of BlownMortgage.comI’m glad Hank Paulson is standing firm on his $700 billion bailout that he’s burdened us with. In his speech today he said that the bailout doesn’t protect every bank from failing.

Phew, now I feel better that the $700 billion is not just the first round of drinks, but rather the entire bar tab. I mean, granted, it’s a bender – but maybe it’s like a bachelor party – once in a life time type of thing. Excessive, yes. Excusable? Maybe with a forgiving bride who’s too embarrassed to say anything.

Except I’m not stupid or too embarrassed, and I hope you aren’t either.

It has quickly become clear to anyone paying attention (and finally it seems people are waking up) that the $700 billion is just the first round in this debacle. How do I know?

Well let’s look at how the fine folks at AIG who needed a tidy $85 billion loan from the Federal Reserve to keep from going bankrupt are doing.

They’re back at the front of the dole line, picking up an extra $40 BILLION to keep operations (like their half-million dollar Ritz-Carlton parties) going strong. And folks, this isn’t an exception – this WILL BE the rule. The US Government has no idea where the tab is going to go. How long did that $85 billion last AIG? Three weeks? This is not the exception, this is the canary in the coal mine. There will be more cash spewing off the presses as more and more institutions come to the dole line.

And it won’t just be banks. None less than the Govenator himself has sent a letter to the Fed asking for help keeping California from running out of cash. We’ll see states, auto dealers, airlines, large real estate companies, sovereign states like Iceland and more all come to the window looking for a little scratch to get by.

Where will we be? We’ll be the stiff with the bill, and even if our drunk friends chip in a bit they’ll always stiff you on the tip. The taxpayers go to the end of the line, go bankrupt, ruin their credit and lose their homes while the government props up irresponsible organizations (no matter their legal formation) with money that doesn’t even exist.

It is the ultimate fallacy of the bailout. $700 billion is a drop in the ocean. They can’t print money fast enough.

From on our canary in the coal mine:

The New York Federal Reserve is lending up to $37.8 billion to American International Group to give the troubled insurer access to much-needed cash.

In exchange, AIG is giving the New York Fed investment-grade, fixed-income securities that it had previously lent out to other institutions for a fee. Those institutions are now returning these securities and want their money back.

The new program, announced Wednesday, is on top of the $85 billion the federal government agreed to lend to AIG last month to prevent the global company from collapsing. AIG said last Friday it had drawn down $61 billion.

Article courtesy of Morgan Brown, Blown Mortgage

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  1. We’re watching the demise of the West and the inexorable rise of Asia. Imagine if the trillions were spent on factories that make things, health, education, housing, etc – instead of propping up usury.

    What do you think of this destruction of wealth of trillions of dollars……Does ‘capitalism’ need to be bailed out by battlers?

    It’s not the banks that need to be privatized; instead it’s the creation of money. If the people created the money (government) instead of the “private reserve banks” like the Fed in the US, and lent it out to the banks at a rate to cover costs (say 1.5%), for the banks to be successful or to fail based on their business sense, then there would NEVER be a credit squeeze again – EVER. The people (government) would be in charge of its creation, and therefore its flow. And there would be factories, and better health facilities, and education. Gee, perhaps government (the people) could create the money to put into public housing and create an asset for the people. It’s called social infrastructure – common sense really.

    Imagine a nation (the people) that held assets that the private sector won’t create because of their profit motive – like cheap affordable housing for the disadvantaged, like cheap affordable nursing home facilities for the ever aging baby boomers, like creating energy projects to save green house. And the private sector, the shareholders who want to invest, can pour their money for a profit motive into what they do now – mining, manufacturing (oh that’s right only Asia and the smart countries like Germany do that), financial services, transport, distribution, agriculture, etc, etc.

    It used to be like that once – oh, I forgot – along came Thatcher and Reagan – it was dumb for the people (government) to be own anything. Sell it ALL – God knows what’s best.

    Even CSIRO is a pale remnant of what it once was – privatize everything – steal it from the people that really owned it and sell it to pay off the bankers for our debt. Debt – you know – that’s the money we used that was created by the bankers out of nothing, and we had to sell most of the people’s (government) assets to pay it back with usury (interest).

    I fear what we will get after this debacle is another bankers con on the world. The World Bank (privately owned), or some other new institution like it, will create the money and distribute it to the nations of the world, via the banking system, and the people will be held to ransom by the New World Order – a single, global financial system controlled by private bankers. Nations will be screwed and if they default, the World Bank will have the right to foreclose – sell off their forests, their minerals, privatize their water, electricity, and communications and effectively keep the people in servitude.

    Oh, I forgot again – their doing this right now in third world countries – Bolivia comes to mind real quick, they even had to pay for the rain that fell into a bucket – that’s OK though – it’s not us – who cares about the rest of the world. Our kids and grandkids will. We’re selling them out. They’ll be the next serfs to the barons (bankers).

  2. Wow! What an amazing response.

    I must say as a small business operator I am disgusted to see the big boys getting bailed out, if my business were in difficulties, even those through no fault of my own (failed customers etc), I would not get a penny of assistance.

    My basic economics education tells me that these multiple bailouts just don’t feel right – what happened to free market economics? (We will need to rewrite the textbooks over this one)


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