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Financial Crisis Big Picture: What has the Government Response Been?

Politics / Credit Crisis 2009 Mar 04, 2009 - 03:23 AM GMT

By: Rudy_Avizius

Politics
Best Financial Markets Analysis ArticleIn the first part of this article we examined how we got ourselves into this economic mess and how our “leaders” and “experts” missed so many warning signs. In this second of 3 parts we will examine what the government response has been.


Our political leaders who once thought that we could spend and borrow our way to prosperity now seem to recognize that indeed something is very wrong. However they still do not view the “big picture” and have instead focused on individual elements of the problem without taking a holistic approach. Their reaction to the economic mess was to pass bailout bills worth over $700 billion, provide insolvent banks with taxpayer cash, guarantee bad debts, and purchase toxic assets. These responses have channeled most of the resources mentioned to our financial institutions in order to “increase their liquidity”.

The very first problem with this approach is that the government is handing money directly to the very same people who caused the problem in the first place. These people are parasites on the system. They do not produce anything. They do not produce any wealth. They just manipulate the money that the producers in our economy have managed to save or invest and skim a percentage for themselves. These are the same people who failed to see the consequences of their actions and now they are being rewarded for their poor judgment?  This creates what is known as a “moral hazard”. What sort of incentives are there in place now to prevent further poor decisions knowing that the government can extort money from the taxpayer and will bail them out?

While it may not have been the perfect solution, would it not have been a better plan to give every American taxpayer a check with the condition that it must be used to pay down debt, or if the taxpayer had no debt they could deposit the money into a bank and hold it there for 1 year and after that the money would be theirs? This would have provided an immediate injection of cash to the banks, allowing the people who would ultimately have to pay the bill to have at least reaped some of the benefits. This approach would have served to forestall some foreclosure on homes as well. This approach would have provided money to the banks that made prudent decisions and allowed those that were completely insolvent to fail. The responsible banks could have picked up the slack of the failed ones.

The second problem with the bailout approach was that the people who were in charge of implementing the program were themselves complicit in creating the mess, and failing to predict and warn the nation of the problems we are now encountering. Secretary Paulson was the CEO of Goldman Sachs for 8 years before becoming Treasury Secretary. He was in charge of the largest Wall Street firm that wrote these questionable financial instruments and then made even more money by betting against these very same instruments once he knew the market was going to collapse. Paulson leaves the scene with an estimated personal net worth of $700 million. Do you believe that he is worried for his future?

Then we have Ben Bernacke, who before his appointment as Chairman of the Federal Reserve, was a member of the Board of Governors of the Federal Reserve System from 2002 to 2005, and Chairman of the President's Council of Economic Advisers, from June 2005 to January 2006. Timothy Geithner was president of the Federal Reserve Bank of New York and also failed to predict and warn the nation of the impending disaster. He played a major role in the $30 billion bailout to prevent the bankruptcy of Bear Stearns. He also played a major role in the bailouts to investment banks. Now these same people who failed to see the warning signs of this crisis were placed in charge of trying to fix it and are distributing $100's of billions of borrowed money to their crony friends on Wall St.

The third problem with government's response was how the funds were distributed was not revealed to the public. The Treasury Secretary distributed $billions to his crony friends, telling us it was important that this information not be publicly available, and we still do not know who received the money or how much they received. We still do not how the money has been used. You can certainly bet that there will ultimately be revelations about corruptions in this process. Those cocktail parties and lobbying efforts certainly paid off handsomely for these banks and financial houses.

How long are the people going to allow this continue?

What we do know is that only those corporations deemed “too big to fail” had money shoveled to them with few strings attached. What we have here is a sort of perverse reverse Darwinism where the weak survive because of government intervention, leaving the responsible and strong to fend for themselves in this environment that favors the big and weak providing them with competitive advantages as a result of government intervention. The perversity continues in a system where profits are kept by the elite, but losses are publicly subsidized by the taxpayer standing the entire capitalist system on its head. It's a classic “heads I win, tails you lose” situation for these companies and their executives. It is corporate welfare at its absolute worst! Again, what are the incentives to prevent further gambling knowing that the government will bail them out if they lose? How does any of the money spent so far add to the productivity of the nation? It is only helping the already rich paper pushers get even richer out of the mess they themselves created. Why do we allow these predators and the corporate controlled media to “spin” that it is the government that is bailing them out, when it is really the taxpayer and future generations?  

The 4th problem is how the bailout money is being used. It is creating companies that are using this money to get even bigger and fatter than they are now. One of the problems was that bank lending had frozen and the goal was to get banks to start lending again. However, most of the money was going to all of the “too big to fail” companies. Common sense would tell anyone that any company that is “too big to fail” is a mortal threat to the economic well being and national security of the United States. Why have our “experts” not recognized this threat? We should be breaking these companies into smaller pieces to reduce this threat. Instead we have again another perverse result that these banks and financial houses are using the funds extorted from the taxpayer to acquire and merge with other banks to become even bigger and fatter than their current “too big to fail” size. Again, this is not a sustainable model and is what got us into this mess to begin with.

If we had smaller banks and financial houses, this economic mess would be significantly easier to manage. More of the same will not work! The bailout funds have been used to pay dividends to shareholders and even bonuses to their executives. For example, Merrill Lynch announced losses of $15 billion, and was acquired by Bank of America. However, the swallowing of Merrill Lynch with its toxic assets proved difficult for Bank of America and the US government provided $138 billion assistance package that included a $20 billion infusion of cash. To add insult to injury, Merrill Lynch normally gives year end bonuses in January, but instead distributed $4 billion surreptitiously in December just days before being taken over by Bank of America. The taxpayer directly paid these $15 billion bonuses. How did this $15 billion money improve productivity? How will it help bring us out of this depression?  What kind of decision making gives away $15 billion in bonuses when the company is losing $15 billion a year? Common sense tells us that these people need to be fired. How will $138 billion to bankrupt Bank of America help build the foundation for a sustainable economy?

The 5th problem with the bailout is its focus on trying to get things moving by having the banks start lending again so the consumer start spending again to continue what was an unsustainable model. The banks are doing what they should have done in the first place and that is to be careful who they lend to. The consumer is now doing what needs to be done by no longer spending, paying down debt, and saving. These things are exactly what the economy needs to start repairing itself and to build a solid foundation for the future. Instead our government is trying to restart the existing system and keep the unsustainable model going. This may delay the ultimate crash, but will only exacerbate it once it does come. Remember the old saying, “the bigger they are, the harder they fall?” We need to experience some pain now so that the problems in the system can work themselves out, rather than delaying the pain and making the situation worse by piling additional debt onto the problem. The bottom line here is that our problems were caused by too much debt, and our government's approach is to solve it by creating even more debt. Common sense tells us that cannot work.

The 6th problem with the bailouts is that no one seems to be asking where the money is coming from. It can only come from 2 sources: creditors or to have the Fed print the money. As we look at multi $trillion deficits for the near future, what guarantee do we have that foreigners will be willing to continue to lend us this money? Even China with its huge foreign exchange surplus is stimulating its economy and may actually become a seller of Treasury Bills rather than a buyer. Who will finance this borrowing? If the government chooses to start printing even more money than it is currently doing, we will most certainly suffer ruinous inflation in the future. This inflation would devastate those on fixed incomes or collecting pensions This printing of money out of thin air could ultimately result in the total collapse of the dollar. We have so far wasted over $350 billion in bailouts and not added anything to the productivity of the nation which is needed to solve this problem.

The 7th problem with the government's response is that one of goals they are trying to accomplish is to stabilize home prices. This approach is similar to a doctor giving a patient with cancer pain killers to ease their suffering, but not doing anything for the cancer itself. The doctor and our government are treating the symptoms of the problem, not the root cause of the problem. The patient needs chemotherapy, not pain killers. In the economy, over the last couple of decades we now have millions of people who have lost their well paying jobs and are either unemployed, underemployed, or employed with earnings significantly less than at their previous jobs. These people can no longer afford the houses they have. This causes them to go into foreclosure and starts the downward economic cycle. How can these people or others with reduced disposable income afford to buy homes if the government policy is to keep home prices high? Of course they cannot afford them and that is why prices are dropping. Once home prices reach a market dictated price level where the masses can afford to buy again, the prices will stabilize. Any attempt by the government to try to fix prices is doomed to failure and will result in vast amounts of money going down a black hole. This money will then not be available for other productive uses. Home prices must naturally drop in order for the workers in the economy to be able to afford them again.

There are certainly other problems with the government's approach to this crisis. What we have experienced with this economic storm is the result of exceptional greed by a few at the expense of the entire nation and world. The growth of personal wealth by the elites is staggering. We have witnessed the largest "redistribution of wealth" from the lower and middle classes to the elites in history. Our corporate media rails about "redistribution of wealth", but in reality this wealth has flowed upwards, not downwards. The masses have been told that this wealth it will "trickle down" to them. Now they have become aware that the elites are feasting at a huge table, and the masses are supposed to be happy for the crumbs that "trickle down" for them to share among the masses. How can these elites sleep at night? The sheer weight of the poverty created by these greedy people threatens to bring down the entire system. The unintended consequence of this may well be that middle America will no longer be investing and supporting the conglomerates of greed.

In the last of the 3 parts of this article, we will examine some solutions that the government and that we as individuals can take to start the process of rebuilding this nation.

By Rudy Avizius

http://www.endtheillusion.org/

Email: rudy@endtheillusion.org

Rudy Avizius is a retired school district administrator and a former Director of Technology who has been following economic and political news very carefully for the last 2 decades. He has recently become active in trying to make sure that the government spends taxpayer money wisely with long term benefits to the nation.

© 2009 Copyright Rudy Avizius - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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