Given the economics discussed below, and the government’s lack of credibility to date, the real costs will now clearly run into the high trillions. The question is, who will get stuck with the losses and how will that loss-distribution process be handled? For Wall Street to applaud the prospect of the upcoming events is lunacy. Why, asks Don Rich, is anyone listening to Paulson and Bernanke? FULL ARTICLE
Source link: http://blog.mises.org/8589/the-idiocy-of-wall-street-applauding-its-own-demise/
The Idiocy of Wall Street: Applauding Its Own Demise
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At this point, I don’t see much reason to oppose the wall street bail out. You see, what the government should do to solve this problem is kill the Federal Reserve, kill the income tax, and cut back the size of government by 90%. But, since there is not a snowballs chance in hell that they are going to do that …. this bailout is just another path to the same eventual outcome.
In fact, if we’re lucky, using taxpayer money to bail out wall street might suck funding away from all the other useless government departments, like the department of homeland security, the pentagon, the DEA, and so on ….
If it takes $700,000,000,000 to avert a crisis, how big is the crisis?
What’s that old explanation for our next course of action? “Whenever a government becomes destructive of these ends, it is the right of the people to alter or to abolish it.” Now would be a good time. Or do we need more evidence? (Don’t worry — it’s on the way.)
Most excellent article. If you ever figure out “Why is anyone still listening to Paulson and Bernanke?“, please let us all know.
Maybe if things sink deep enough, we can give freedom a try next time around? You know, all those old ideas like capitalism, personal responsibility and all that?
The handling of this financial crisis – a crisis caused by the government and the central bank – is critical to America. Bailouts and socialization of the financial sector will mean that the US is no longer the leader of the capitalist world. China, the rising power in the world, is already calling for a world currency and financial system which is not dependent on the US. Perhaps the Chinese fondness for gold will find its way into gold as currency. The call by the Chinese for a new currency is the first public step toward shifting the world leadership (dominated by the US for over 100 years) to China and perhaps India. This why some prominent members of the financial community and some companies have left the US for overseas locations. The US is at a cross roads – socialism or free market.
The handling of this financial crisis – a crisis caused by the government and the central bank – is critical to America. Bailouts and socialization of the financial sector will mean that the US is no longer the leader of the capitalist world. China, the rising power in the world, is already calling for a world currency and financial system which is not dependent on the US. Perhaps the Chinese fondness for gold will find its way into gold as currency. The call by the Chinese for a new currency is the first public step toward shifting the world leadership (dominated by the US for over 100 years) to China and perhaps India. This why some prominent members of the financial community and some companies have left the US for overseas locations. The US is at a cross roads – socialism or free market.
The handling of this financial crisis – a crisis caused by the government and the central bank – is critical to America. Bailouts and socialization of the financial sector will mean that the US is no longer the leader of the capitalist world. China, the rising power in the world, is already calling for a world currency and financial system which is not dependent on the US. Perhaps the Chinese fondness for gold will find its way into gold as currency. The call by the Chinese for a new currency is the first public step toward shifting the world leadership (dominated by the US for over 100 years) to China and perhaps India. This why some prominent members of the financial community and some companies have left the US for overseas locations. The US is at a cross roads – socialism or free market.
Decades ago, I was studying someone’s (I think, Mises’s) description of the “crack-up boom,” the one that immediately precedes the final collapse and ensuing chaos.
The prominent think I tucked away in my mind to watch out for the rest of my life was greatly increased volatility in the stock and other markets.
Well, in all those decades, I’ve seen nothing that quite so well meets that description as this.
So . . . here it comes (according to Mises)!
I think the optimal pre-emptive strategery here is to imprision the Federal Reserve Board of Governors and the principals in the Treasury and impeach Bush and Cheny for the 50bill that they already ripped off. At least pull an Abraham Lincoln and imprision them for several weeks until this crisis is no longer a crisis.
As for the 5 trillion, always multiply government estimates of tax payer expense by a factor of 7, DO NOT DO IT. If Buffet, Wells Fargo and Walmart are suddenly buying failed banks whose credit is federalized then there IS NO CRISIS.
I think there is a 4 possibility:sell treasury bonds and increase the national debt.It is still 60% of the GDP,japan is now 120% and Canada is more than 100% since the 1980.I mean that they can earn time to blame someonelse in the future(3 to 5 years)
The simplest solution for elected officials is to take the option of printing money to pay off everything. Simple is good in the eyes of the simpletons who run our government.
The resulting inflation will destroy everyone’s savings, but it will make the worthless debts worth their face value in worthless currency and mask the problem.
I am expecting a combination package where the government buys everything cheap when it fails and sells it back to friends of the government. This will be done with manufactured money that will drive inflation and devaluate debts for everyone (and make the toxic debt look good again).
And in the finest Fascist tradition, the government will impose massive regulation of everything it buys and sells. Truly American business will be a subsidiary of American government.
Investment banks such as Lehman became dependent on short term and overnight funding to support their balance sheets. In Lehman’s case, I believe 25% of their liabilities were funded overnight.
There have been half a dozen LIBOR spikes over the last year, each of which was a valid and true signal that borrowing short and lending long might lead to disaster in the realizable future.
Instead of acting on this signal by deleveraging, selling assets, or raising equity, central banks, including the fed, added or arranged for more liquidity.
This has been disastrous, because it perversely encouraged the affected banks NOT to take the prompt actions necessary to reduce their dependence on short term money.
It has to stop. Overnight funding of questionable assets is not a right.
“Why is anyone listening to Paulson and Bernanke?”
Because they’re from the government and they’re here to help us.
No? Ok how’s this? Because we’re all Keynesian’s now.
@Potts: probably Mises, about “crack-up boom.” I have only just started to read him and Rothbard on this site. He mentioned it in “Interventionism: An Economic Analysis” which is available online, see:
http://mises.org/etexts/mises/interventionism/section3.asp
Mises said:
“Because the effects which the inflationists seek by inflation are of a temporary nature only, there can never be enough inflation from the inflationist point of view. Once the quantity of money ceases to increase, the groups who were reaping gains during the inflation lose their privileged position. They may keep the gains they realized during the inflation but they cannot make any further gains. The gradual rise of the prices of goods which they previously were buying at comparatively low prices now impairs their position because as sellers they cannot expect prices to rise further. The clamor for inflation will therefore persist.”
Regarding Paulson, Bernanke and all of their Wall Street buddies, who have “reaped the gains” and now may stand to lose their “privileged position”:
http://lee.org/blog/wp-content/uploads/2008/05/8.jpg
Does anyone have any comment on Bill Gross of Pimco’s op-ed today that the government will make about 7% profit from the sale of the mortgage backed securities once every thing is said and done, and the “bailout” will end up being a profit making venture for the feds?
An item absent from the discussion so far is the security consequences of the use of massive amounts of new funds, as currently proposed by the Fed, Chairman and Sectretary Paulson. In the eighties the US effectively crippled the former Soviet Union in part by financial means. Would not the current proposal be a rerun of this strategy thereby putting the US in harms way for a payback action?
I had a question for people who are more informed about monetary theory than I: can you explain what exactly is meant by this paragraph from the column? I think my problem is in the terminology; basically, what is meant by asset prices and debt securities? I’m trying to learn.
“In a bubble, asset prices are by definition far above equilibrium values. The federal government is now committed to guaranteeing the difference between the real equilibrium values of all debt securities and their stated/nominal value, which was created during the greatest credit bubble in history.”
“In the eighties the US effectively crippled the former Soviet Union in part by financial means.”
This is the myth that Reagan won the cold war. Just because two things happen at the same time doesn’t prove cause and effect. One must not ignore the fact that Soviet socialism could build plenty of nukes but couldn’t allocate resources correctly to get food to market. If the old Soviet Union really wanted to go to war with the US, it could have done so.
And I don’t think that the Soviets were “outspent” into collapse either, since while we spend billions inventing ink pens that can write in space, the Soviets used pencils, or simply didn’t bother to go to the moon to play golf.
No, I don’t buy that old US government spending brought the Soviets to their knees. More likely it was simple economics of consumer goods that finally did that government in.
Arguably, the whole concept of loading American intersts down with debt is to create a New World Order. In this 1984 dystopia, the central bankers and their political underlings will rule globally from a centralized machine of statism supported by M4 totting cogs, surveillance cameras, and a littany of assinine legislation and litigation. All of this is happening for a reason-global slavery.
John:
A bond is both a debt security and a financial asset for the purchaser (lender). The author was speaking about the large increase in credit availability (caused by the Fed following the dot.com collapse) that both drove down the yields of low risk financial assets (Treasuries) and led lenders to accept riskier finacial assets for less of an additional yield premium than normal. So even high risk finacial assets were low yielding. The arithmetic relationship between financial asset prices and yields means that low yields are synonomous with high financial asset prices. So the author argues that the credit expansion initiated by the Fed caused yields of even high risk assets to be too low, or, one could say, caused these asset prices to be too high.
Government interference is an old story. Easy money policies are addictive. So print the presses, buy the votes and worry later. The Fed is to blame and so are the political leaders who fail us repeatedly.Now here is the question, when you see a politician drowning
what do you do? Go to lunch, read a book or listen to talk radio?
Let’s compare track records
You (Bernanke) have now decided that the economy may be in a recession and you and are worried about a return of a depression. How many days ago (or weeks at most) did you finally admit that there was a recession. Did you know about it earlier but just lied to Congress?
Ron Paul, on the other hand, has been warning about exactly what we are experiencing for 30 years and about five years ago he specifically identified the actions that precipitated this bursting of the bubble. He has been forthright with the Congress and the American people. Ron Paul has also been your greatest critic even though he sincerely tried to educate you about the errors of your ways.
Based on these records of credibility why should we believe you (Bernanke) when you say that we should take money (in the form of hyperinflation) from the taxpayers to bail out Wall Street simply because they cooperated with the counterfeiting operation of the Federal Reserve?
Instead citizens should be confident that the principles of classical liberalism that underlie our Constitution clearly guide us to identify the bailout as an act of treason since it just gives more power to the unConstitutional coup.
Bernanke serves the unConstitutional coup as a figurehead. Why would anyone believe a word he says based on his track record?
Paulson is actually one of the inner circle of the unConstitutional coup. There, right in front of Congress, sits a kingpin of the unConstituional coup and they do nothing! Seize the economic terrorist and find out who are the other members of the inner circle of the unConstitutional coup!
Do your job Congress! May God grant you the courage to defend the Constitution.
Come on guys. This article is more like a wake than a revivalist meeting. The Lord Gold is making his return. Rejoice all ye who kept the faith. Run you Keynesians, Monetarists and other Socialists types– but you will find nowhere to hide now. The gleaming from the 99.6% fine ingots shall find you in your darkest hole and enlighten you. Repent all ye bureaucrats of central banking and fiat currencies. Your time has come! Now you shall stand before the Lord Gold and beg for a Real Bills Doctrine.
This article certainly stirred up matters today.
I would like to try another few notions. In 1913 the Fed came into existance by stealth. It had a 20 year mandate only. Does anyone have a legal reference that explicitly extended the contract?
In the 70s a significant number of banks gave Chairman Volker notice of intentions to exit the Fed. System. He had US lawmakers change the rules making it illegal for any institution to take deposits unless it was in the Fed System. My question is does that condition match the description a “coersive natural monopoly”?
Last question. If it is a “coerosive natural monopoly” and is a for-profit, privately owned enterprise, not subject to taxation, liability law and political oversight, how would one not expect it to it operate in a purely self-serving manner and plunder the US economy without restraint?
“So this is how liberty dies, with thunderous applause . . . ”
Senator Amidala, Senate Chambers, Star Wars: Revenge of the Sith
“I don’t buy that old US government spending brought the Soviets to their knees. More likely it was simple economics of consumer goods that finally did that government in.”
Eric, Don’t forget the interventionist war in Afghanistan!
A refinement on the point of spending the Soviets into failure.
While it might be an exagerated understanding, and I heard President Regan say in public in New Orleans that is was all about Radio Free Europe, the issue today is more what Mr. Putin believes. Revenge is a powerfull motivater and Mr. Putin stikes me as a kind of “not get mad but get even” kind of person.
Tehiya: “Does anyone have any comment on Bill Gross of Pimco’s op-ed today that the government will make about 7% profit from the sale of the mortgage backed securities once every thing is said and done, and the “bailout” will end up being a profit making venture for the feds?â€
Bill Gross knows a lot more about pricing assets than I do, but his comments don’t add up. It’s very interesting that Gross can price the MBS, because no one else can. The reason for the freeze up in the market is that no one knows the value of the MBS so no one will buy or sell them. Ultimately, the value of the MBS depends on housing prices, which continue to fall rapidly. Only when housing prices stop falling, or if forecasts of prices include future declines, will pricing MBS be possible. If private experts, excpet for Gross, can’t price these things, what makes Congress think they will hire someone who can?
Why would the banks sell their MBS if the gov can make 7%? The gov can supposedly make 7% because it can borrow at 3%, which means the MBS would have to earn 10%. The banks have already lost money on the assets. That is their sunk costs. They don’t have to borrow money to buy the MBS because they already own them. Why shouldn’t they keep them and earn back some of what they lost if they are going to appreciate by 10% annually? If they sell them to the gov, they lock in their losses with no hope of reducing them. It doesn’t make any sense.
I listended to the guy who ran the old Resolution Trust Corp after the S&L bail out on CNBC and he said that anyone who attempts to forecast where this bail out is going is a very brave man. He said that the RTC hurt the housing market for many years because it had a huge inventory of houses to dump every time prices rose a little. He said the same thing will happen with this bail out and gov purchase of MBS. The gov will own $700 billion of MBS which it will try to sell. Every time the price sticks its head above water, the gov will blow it off.
PS, I found this from Arnold Kling over at the Econ Library web site: “The housing market is out of balance, in part due to excess home borrowing. Until it is in balance, no one will know what mortgage securities are worth.”
The important thing to know about this statement is that Kling worked at one of the GSE’s as a pricing analyst for several years. He really knows how to price mortgages, something I can’t say for anyone in Washington.
US real estate-values. It may help to look at the Case-Shiller Residential Real- estate Index.
The index is for the period 1890 to now and shows the relationship between the cost of housing compared with the cost of other goods (like living costs).
In 2006 the index was at a value of 210. During the depression it saw 60.
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