A remarkable article by J.S. Kim, "The Undisclosed Costs of the U.S. Government Bailouts" in Seeking Alpha, 22 September 2008
Since I know this story will be spun into a positive news story on Monday, I thought it imperative to really tell you the honest headline of this massive government planned $700 billion bailout before the press releases their version. According to MarketWatch: “The plan allows the government to buy the bad debt of U.S. financial institutions for the next two years, according to a draft of the proposed legislation. It gives the Treasury secretary the authority to buy $700 billion in mortgage-related assets, in a bid to address the root cause of the turmoil that swept through markets this past week and resulted in the filing for bankruptcy by and government takeovers of some of the biggest U.S. financial companies.” However, Senator Schumer of New York noted that the plan “includes no visible protection for taxpayers.”
Of course not, because given the actions of the past several weeks, I can only guess that the American taxpayer is the designated sucker in this bailout plan as well. Because the American taxpayer has already been the designated sucker for the bankruptcies of Bear Stearns (BSC), Fannie Mae (FNM), Freddie Mac (FRE), and AIG (AIG), why change things now? By keeping the American taxpayer as the sucker, this allows all banking executives and Wall Street executives to keep the hundreds of millions of dollars in salaries, stock options, and bonuses that they have taken over the past several years. In fact, this reported news cements in my mind that the American taxpayer has already been targeted as the sucker in this new bailout plan: “Treasury Secretary Henry Paulson sent the plan to Capitol Hill on Friday night, a Treasury spokesman said. Lawmakers have pledged rapid action. On Friday, some said they were optimistic it would be approved next week.”
The biggest bailout in economic history, a plan so important to the future of every American, should have as a prerequisite for passage a carefully and intelligent moderated public debate for at least one week at a minimum. Instead, there is a sense of desperation to pass this legislation as quickly as possible, an urgency that I can only interpret to mean that there is something very unpalatable about this plan. Of course, the mainstream media will spin the urgency to pass this legislation quickly with an absence of debate as necessary due to the inability of blue-chip corporations to roll-over short-term commercial paper and a near meltdown last week. But this is just political spin. I am quite sure that the architects of this plan have been discussing this plan for months on end now. If you really believe that Hank Paulson and friends must pass the plan to save the U.S. and global financial system with no real debate due to its “urgency” as it is being painted, then you need to return to the Land of Oz where delusions predominate. It is being painted as a frantic plan put together in the wee hours of the night, just as the bailout of Bear Stearns was, so that zero debate can occur in regard to the most unpalatable elements of this plan that are the most destructive to every American citizen.
Fool Me Once. Fool Me Twice. Fool Me Three Times, etc.
In regard to who will likely ultimately pay for this new bailout plan, recall this Congressional hearing between Senator Jim Bunning and U.S. Secretary of Treasury Hank Paulson regarding the Fannie Mae and Freddie Mac bailout plan earlier this month:
Senator Jim Bunning: “Where will the money come from if in fact we have to use the backstop?”
Secretary Paulson: “As, as, as, as, I said to you, that, uh, that, it is my very strong belief that the way we can minimize the cost to the taxpayer, the way to minimize that cost in all likelihood is to be unspecified and to enhance confidence in, in, in the market. So that’s my answer. It continues to be my answer.”
Senator Bunning: “But it doesn’t answer the question. Where is the money going to come from if you have to put it up?”
Secretary of Treasury Paulson: “Well obviously it will come from the government.”
Senator Bunning: “And who is the government?”
Secretary Paulson: “The taxpayer.”
Note that during that previous Congressional hearing, Secretary Paulson argues that costs of the Fannie Mae and Freddie Mac bailout to all Americans can be minimized by approving an “unspecified” line of credit, in essence a blank check, to bail them out. Excuse me, but Secretary Paulson you just received an an “F” for logic. The way to minimize the cost to the taxpayer would have been to cap the bailout number for Fannie Mae and Freddie Mac, instead of leaving it unspecified and unlimited.
Again, it is imperative to understand that whatever positive story is spun from this bailout, that all of these bailouts are literally taking tens, if not hundreds of thousands of dollars out of the pocket of every working American (over generations). Again, as a basis for whether you should trust this new bailout plan, one only need recall the Congressional testimony of one of its top architects, Hank Paulson, when he was questioned by U.S. Senator Jon Tester. In response to the health of Fannie Mae and Freddie Mac just weeks before their collapse, Secretary Paulson stated: “We have no intent to nationalize [Fannie Mae and Freddie Mac]”, and “I don’t buy into the proposition that these institutions [Fannie Mae and Freddie Mac] are not viable.” So when Hank Paulson will undoubtedly tell us this week that this new bailout plan will only cost $700 billion and that it is what is best for every American, do you really want to blindly trust his proclamation?
Where Does the Money Come From?
Given that these cumulative bailouts are now in the range of trillions of dollars, what happens if American taxpayers can’t come up with this money? Again, official government numbers for this bailout are not credible. For example, the “official” cost to the U.S. taxpayer of $200 billion for the bailout of Fannie Mae and Freddie Mac of $200 billion is highly delusional and grossly underestimated. The final cost is much more likely to be north of $1 trillion. And oh, by the way, the U.S. government, by making U.S. taxpayers responsible for covering the losses of Fannie Mae and Freddie Mac, has also implicitly stated in this action, that they have zero problem with having Americans subsidize the losses of China, Japan, Belgium, Luxembourg and the Cayman Islands. Since those five countries were the largest holders of Fannie Mae and Freddie Mac debt, American taxpayer money is being used to bailout the debt of those countries as well.
Make ZERO mistake about it, the loser will not be just American taxpayers, but all Americans, American taxpayers and their children too. I know that a lot of people will state, “there is no way that the government can squeeze trillions and trillions of dollars out of the American taxpayer to socialize 100% the losses of the U.S. banking industry and Wall Street.” While this is true, they will squeeze as much as they can out of the American taxpayer until the squeezing process becomes like trying to squeeze blood from a turnip. At this point, as Senator Bunning said, “WHERE WILL THE MONEY COME FROM?” Furthermore, I’m highly skeptical of the $700 billion figure being fed to the masses. My guess is that the actual figure, when all is said and done, will be multiples of this initial estimate. The bigger question is this: Is this really how we want government to act? To systematically dismantle every piece of legislation that was specifically enacted since the 1933 Glass Steagall Act to prevent such a debacle from happening again, to respond to every Wall Street lobbying group by granting them every exploitable loophole possible to make billions and billions of dollars (if you know your legislative history, the SEC and the CFTC have been guilty of doing this for decades), and then to respond to this irresponsible behavior by passing more regulations in history to socialize all of these losses so that the burden lies not with the creators of this problem but with all American citizens?
The Answer is No Matter How These Bailouts Unfold, The Money Ultimately Will Come From the People
I can guarantee that even though I am publishing this article before the official plan is released that the media will spin the bailout plan as funded by the government money without ever addressing the question of “Where will the government get the money from?” As Secretary Paulson already established in Congressional testimony, he considers the people the government even though we have no say in the legislation that socializes these losses. But we’ve also established that once the people have no more money, that the bailout plans will likely still be short trillions and trillions of dollars. So “Where does the money come from?” The answer, again, is “the people!”. If you are confused by my answer, I’ll explain.
The money the government can’t squeeze out of the people for these massive bailouts will have to come from the printing presses of the U.S. Federal Reserve. Printing trillions of dollars can pay the balance of these losses but also guarantees erosion in the value of the dollar. Imagine that the bailout causes the dollar to erode another “X”% over the next five years. I don’t even want to take a stab at what “X” will be other than the fact that it will most likely be a huge number. If his happens, then this results in a loss of purchasing power parity for all Americans at home and abroad. In essence, it acts like an invisible tax. For all intents and purposes, if the dollar erodes by 30% over the next two years because of this near guaranteed monetary expansion, it matters not whether the government imposed a 30% tax on all American’s savings to achieve this or whether it happened because of massive monetary expansion. The end result is the same. So, WHERE DOES THE MONEY COME FROM? The answer, sadly, is not the government, but still the people.
The third President of the United States, Thomas Jefferson, once stated, “If the American people ever allow the banks to control issuance of their currency, first by inflation and then by deflation, the banks and corporations that grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers occupied.” Right now, Jefferson must be rolling over in his grave now because not only could we not figure out how to prevent what he warned us was going to happen even though we had 200 years to figure it out, but we were also so blind that we cheered the very events in the 80’s and 90’s that brought us the crisis we have today. However, the architects of this bailout must be smiling today, because they are in the process of committing the largest robbery of American wealth in history since the Great Depression. As for us, we’re still asleep at the wheel, still oblivious to this robbery, and still content to believe every word we’re told to believe instead of thinking for ourselves.
What we have here is another "Patriot Act", in effect a coup d'etat, but this time one that has commandeered the federal coffers and issued the contents to the banks and those that run them.
How long can it be before the American people "take up arms" to rescue their democracy? When they do, they will find it broke, but at least they will govern themselves again -- for the people, by the people, of the people.