Well ... almost.
On Monday, in a rare show of support for the people they represent, the United States House of Representatives said "NO!" to Treasury Secretary Henry Paulson's $700 billion fleecing of the American taxpayers.
This was monumental! Here, in "modern times," the people we sent to Washington to actually embraced the American revolutionary spirit!
The leaders of both parties, major newspapers and think tanks, the mainstream media, college professors, large corporations, and even Jim Cramer were all in cahoots to force American taxpayers to artificially support failed businesses and their wealthy executives. But in a BOLD move, the House of Representatives said "NO!"
The Senate added some 400+ pages to the bill and passed it again last night, and the House has the opportunity again today to knock this bad deal for American taxpayers down. Will they? I don't know ... and I fear the worst ... but the original "NO!" vote gives us reason to celebrate, because it reminds us voters, that "we the people" can change Washington and break-up the collusion of career politicians, large corporations and the federal government.
Bailout Everyone:
Just a few short weeks ago, the prestigious and very large investment bank Lehman Brothers went bankrupt. Lehman Brothers had assets of about $6340 billion and employed more than 26,000 people. Isn't Lehman then, "too big to fail"? Did the Earth stop spinning on its axis? Did the Sun implode?
Nope.
In a matter of days, the market reallocated the parts of Lehman Brothers, the Earth continued to spin and the Sun continued to shine!
A plethora of bad debts took down Wall Street giant Merrill Lynch! Yet the natural mechanisms of the market went to work, Bank of America bought them out, and the good and bad parts are allocated to their economically advantageous roles.
Washington Mutual, the largest savings and loan in the country went belly-up too! This was the largest bank failure in US history! JP Morgan Chase bought up their good assets, and as far as I can tell ... the Earth continues to spin on its axis, and the Sun continues to shine.
Crisis and Leviathan:
Way back "in the day," when I was a mere college student studying to earn my bachelor's degree in Finance, I was required to read Robert Higgs' book, Crisis and Leviathan. In the book, Higgins details the economic history of the 20th century in the US, and with precision, shows the reader how government grows during times of crisis (real or imagined), and individual liberty fades. In most cases, the growth of government confronts us "through the back-door", sneaking in with hardly a notice. Just a few measly days ago however, the monstrous growth of the federal government came through the front door!
Just listen to President Bush has he tries to create panic:
"Our entire economy is in danger ... America could slip into a financial panic ... Ultimately, our country could experience a long and painful recession. Fellow citizens, we must not let this happen."
"With the situation becoming more precarious by the day, I faced a choice: to step in with dramatic government action or to stand back and allow the irresponsible actions of some to undermine the financial security of all."
Suddenly, out of the clear blue sky, a "crisis" is born! One that needs "dramatic government action," and it needs that action NOW!
I have to ask ... since it's simply impossible that a "crisis" of this magnitude happened overnight, why the sudden rush?
A Bailout Won't Work Anyways:
I'll give you two fundamental reasons why a $700 billion bailout to "save capitalism" is a complete economic fallacy.
1) Price Matters. The price of the banks must be allowed to drop to the point were buyers are willing to step in, such as the case with Bank of America buying Merrill Lynch. Price represents the true value of an asset at a given time. When government jumps to interfere with the natural pricing mechanism, the assets become priced artificially high, forcing would-be buyers of those assets who could put them to good economic use to sit idle on the sidelines watching them fail.
Think about it like this. Let's say the current price of a Widget is $10, but the Fed lowered interest rates creating a whirlwind of new money therefore pushing the price of Widgets up to $50. A classic example of a bubble. This is what happened in both the stock market and real estate market this decade. But what if the price collapses, and people are only willing to pay $10 for a Widget again?
The government can come to the rescue! They can artificially create demand by buying up all the Widgets at $50 a pop. Both the manufacturers and retailers of the Widgets would be made whole, but what about the customers? They still are only willing to pay $10 for a Widget. The manufacturers won't produce more Widgets and the retailers won't buy new Widgets because just like the inventory the government just bought, they'll sit on the shelves and collect dust. People are only willing to pay $10.
The government could force the manufacturers to produce them and the retailers to buy them, but the people will continue to refuse to purchase the Widgets, resulting in the manufacturers and retailers being forced into bankruptcy. They "stabilized" the price, but ended up with negative consequences.
The government could just buy the manufacturers and retailers to keep the price "stable" at $50 per unit, but in the end ... nothing has changed ... the price is still $10 - even after the government "bailed" everyone out.
Maybe they could send in the National Guard, and force everyone to buy a Widget at $50 via gunpoint ... but the result would still be the same. People are only willing to buy a Widget for $10, hence the price of a Widget remains at $10.
Would you like to buy a $10 Widget for $50?
Right now, we need falling prices! Anybody notice the price of gas has been in steady decline? You tell me what affects your family more. A Wall Street investment bank failing? Or the price of gas, electricity and food?
2) Buying bad debt doesn't address the problem. To take it to an extreme, every troubled bank could take an eraser to their books and erase all their bad debt. Poof! Gone. But this doesn't give the bank more money to lend.
Banks lend your money, not theirs. When you're productive and earn money, you deposit it in the bank. The bank then uses this store of wealth to create loans. When the real estate market was skyrocketing into its bubble, money was being lent based on a mirage of increased values (the Wealth Effect), instead of actual wealth created by productivity. Soon, housing prices started falling back to Earth ... and unlike loans against your deposits, as the prices fell, the banks were left with liabilities that had no store of wealth behind them.
You can pump all the money you want into the banking system, but you're still right where you started - with no store of wealth. Without wealth, there are no loans. Think of it this way. If pumping money into the banking system created wealth, wouldn't we all be living like Bill Gates and be able to feed everyone in the world?
Read My Lips, No Great Depression:
Bailout or not, things in the banking industry are going to get worse. It will happen if Congress forces the taxpayers of America to fork over $700 billion, and it will happen if taxpayers don't fork over another dime. The business cycle has not been repealed.
During the Great Depression, over 40% of homes went into foreclosure. Today we're only around 6%. When the bubble burst in the stock market back in 1929, President Hoover (contrary to popular "wisdom") began the massive government interventionist programs that became known as FDR's New Deal. These government programs dragged "the people" through the financial mud until the end of WWII. They created complete destruction. The idea that the New Deal "saved" the economy is a myth. The facts ALL point to the New Deal as a Great Disaster!
And the New Deal was about half the price of this current bailout nonsense.
Back to today ... Credit is still available! Commercial and industrial loans are at an all-time high. Consumer loans at commercial banks are at an all-time high too. In fact, bank credit at all commercial banks are close to their all-time highs! Does this look like a "credit freeze" to you?
Constitution? Uh ... What Constitution?
A mere 2 weeks ago ... yeah, real estate prices were falling, banks had failed, and lending restrictions tightened, but the economy was moving along. Suddenly, we wake up to the "shock and awe" of a crisis the magnitude of Armageddon, that MUST be acted upon NOW!
This event is so catastrophic, that the government must burden the taxpayers, their children, their grandchildren and their great grandchildren ... and it MUST GET DONE NOW!
So off they go ... the Political Class ... twisting arms, making threats, spewing hyperbole, and porking it up like there's no tomorrow ... all in the name of using our Constitution as a piece of toilet paper, so we can give the Political Class powers they were never meant to have.
The Treasury will be shielded from Congressional oversight, given the power to print money, authorized to spend without Congressional approval, taxpayer approval, or even a budget. This bill will also provide the Treasury the POWER TO TAX!
Call, write, send smoke signals to your representatives! Tell them to "JUST SAY NO!" ... or this could be the end of the Republic as we know it.
