Call it Hurricane Ben, if you will.
Last week the world of finance was rocked hard as the policies of the Federal Reserve and the U.S. government finally came home to roost, with one major investment bank going under and many more in dire straits and being bought up at fire-sale prices.
It started last Monday when Lehman Brothers filed for bankruptcy and police moved in to block off all access to the company’s New York headquarters. The desks are still being cleaned out today as the company is being broken into bits and pieces and being sold off. Some account holders might even get some of their money back, according to a Securities Investor Protection Corporation press release.
The same day, Washington Mutual had its credit rating cut to junk. “Increasing market turmoil and the related impact from managing its concentrated mortgage franchise in this troubled housing and credit cycle led to the downgrade,” according to Standard & Poor’s.
And Bank of America announced that it would buy Merrill Lynch lock, stock and barrel, subject to regulatory approval.
On Tuesday, the Federal Reserve spent $85 billion it expects to take from you in order to bail out insurance giant American International Group. As part of the deal, the central bank will own 80 percent of the company. That means that you’re on the hook for AIG’s bad investment decisions. Believe it or not, this move initially drew criticism from both parties in Congress.
Morgan Stanley wasn’t looking too good either, and last week it was openly courting suitors. This morning news came that Mitsubishi UFJ Financial Group would buy as much as 20% of Morgan Stanley common stock for an undisclosed sum.
And this weekend Morgan Stanley and Goldman Sachs filed for a change in status to bank holding companies, which would allow them to operate commercial banks and take deposits directly from investors. The Federal Reserve granted the requests Sunday. One wonders who’s going to deposit their savings at these distressed companies.
By Friday the government was openly talking about setting up a Department of Bailouts, as it were, and as you might expect, virtually everybody is trying to figure out how to get the government — or, rather, you — to bail them out. With the expected price tag at $700 billion and climbing, Treasury secretary Henry Paulson nevertheless said that the program would “cost Americans far less than the alternative.”
Of course, Paulson is either clueless or stupid, asking “How did we ever get here?” on Meet the Press Sunday. How we got here is pretty obvious and was completely predictable. In fact, several notable people did predict it.
In case you have been living under a rock since 1913, when this whole mess started, you can lay the whole of it at the feet of the Federal Reserve, and those people who support such an institution.
In The End of Liberaism: The Second Republic of the United States, (1978) Theodore Lovi says that the Second Republic is marked by a “state of permanent receivership,” where “a state whose government maintains a steadfast position that any institution large enough to be a significant factor in the community may have its stability underwritten. It is a system of policies that sets a general floor under risk, either by attempting to eliminate risk or to reduce or share the costs of failure.” Sound familiar?
John Samples, director of the Cato Institute’s Center for Representative Government, explains: “Markets deal with risk through deterrence. Individuals and firms take risks and gain or lose from their decisions. The gain or loss comes after the decision. If individuals and firms are protected from losses through taxpayer interventions, deterrence against bad risks cannot work. Risks are dealt with prior to a decision rather than afterwards. The government is charged with preventing unwise risk-taking before any decisions are made. Government officials come to have a veto over choices by private actors. In this way, the United States of permanent receivership becomes in theory, and more and more in practice, a state of control over private decisions.”
In “Why Paulson is wrong,” Luigi Zingales, research professor at the University of Chicago Graduate School of Business and author of Saving Capitalism From the Capitalists, puts it plainly: “Do we want to live in a system where profits are private, but losses are socialized? Where taxpayer money is used to prop up failed firms? Or do we want to live in a system where people are held responsible for their decisions, where imprudent behavior is penalized and prudent behavior rewarded?”
And I haven’t even gotten into what Ron Paul has said. I think he’s said it about 300 times in the last week on every major news network. Of course, he predicted the Fannie Mae and Freddie Mac mortgage crisis in 2003. Who listened then? Will you listen now?
Here’s a sample from Sunday, on CNN.
You should have voted for Ron Paul when you had the chance. Presidential candidates John McCain and Barack Obama both support the $700 billion bailout plan, though neither has figured out how to fool the people into believing they won’t have to pay for it.
And finally, to add insult to injury, last week the Treasury Department launched an advertising campaign aimed at 18 to 24 year olds to teach them about the importance of credit, including two videos, radio ads and a very bad Flash-based online game called the “Bad Credit Hotel.”
In the meanwhile, the next week promises to hold more financial doom and gloom. But gold and silver are rebounding. I hope you took my previous advice and bought all you can get your hands on. If not, now’s a good time to start. After that, it’s time to, as Ron Paul says, get rid of the Federal Reserve and return to sound money.
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Matthew Claypool
Sep 22, 2008
I’m tired of all the talk about how Americans need to embrace the socialization of these financial institutions because the alternative is a total meltdown. I’m not against socialism in some of its forms (I’m glad that income taxes taken from people making minimum wage at a fast food place can go to pay for people like Ted Kennedy to have brain surgery. I say bless the socialized congressional health package. I’ve BEEN that burger flipper who couldn’t afford to get sick because I had no insurance and couldn’t miss work– I know how much that can weigh on a person’s mind, and I wouldn’t want any of our politicians’ time to be spent wondering what might happen if they get ill– it seems they’ve got enough on their plate already) but on the issue of the bailout I actually agree with the former position of Bush and McCain (I say former because they seem to have forgotten their own words). I say, let the market bear it out!! If these financial institutions are losing money it’s because of poor business decisions. Their businesses fail because they have an inferior product/leadership. Obviously the CEOs and CFOs need to go back to school because they are terrible at their jobs… otherwise, they will continue to make the same mistakes.
But the bigger picture is that this wasn’t a mistake. These institutions were designed and manipulated to work this way. People saw it coming and everyone said, oh no, wait and see, it’s an adjustment, let the market bear it out, let them work free of government involvement (government only makes it worse)– well, the market has given birth to this situation and now I say “let them eat stock.” Much like the maligned welfare mother of conservative myth, if we give them something now, they’ll just keep coming back for more. If we let them starve we will actually teach all those poor Wall Street-ers the value of hard work (I know there are a lot of burgers out there that need to be flipped)– if they work hard enough, they will overcome ALL obstacles (that’s the American dream, no?).
People are saying we can’t let these companies implode because the whole economy will go down– we could have a depression. To them I say, look around. The majority of Americans are already living like it’s a depression. For anyone making less than $50K (the majority of America), it’s not going to be a huge difference, but it COULD allow us to re-tool and re-style the economy. It’s been clear for years that capitalism in its current form is broken. The system continues to work for an ever-shrinking number of Americans while the plurality gets left with the bill.
We as Americans don’t have to accept the business dealings that are going on between Wall Street and Capitol Hill. [As inevitable as it seemed we didn't have to accept the war with Iraq. It felt like a foregone conclusion, but it wan't and this isn't either. It's not inevitable, but we have to speak up now.] It’s time we stand together to teach those who have spent years manipulating the rule of law in this great nation, that we will not lay down yet again. I am not alone and neither are you. It’s time we teach those in power what the value of a dollar really is (before they destroy THAT, too).
gus
Sep 22, 2008
I was wondering where all the money lost in this mess went to.Was this real money or only conffident in the system.Gold is the answer.
Sep 23, 2008
Listings. Listings. Listings. Still. | national real estate opinion column - agentgenius.com
miche
Sep 24, 2008
Great post, Hampton. Now go for round two, link the dots and write something about this.
Sep 26, 2008
Secret bailouts coming? - Homeland Stupidity
Sep 29, 2008
I.O.U.S.A.: One Nation. Under Stress. In Debt. - Homeland Stupidity
Peggy McGilligan
Sep 29, 2008
Just Say No: imagine, a $1-trillion dollar bailout without even a hint at wrongdoing or malfeasance. Many of the fat cats who circulate from board to board and from job to job, are also members of the Trilateral Commission and or the Bilderberg Group. When someone takes your money and steals your car, it makes an impression. When they’re committed globalists, it leaves a lasting impression. Many elected officials even belong to the cabals. When Bill Clinton eased banking restrictions, he dished out $8-billion dollars for community reinvestment loans. When the financing schemes fell through, as is their wont whenever 30-million Mexican nationals buy inflated properties and default, it left banks in the lurch. Hillary Clinton counted on the loan giveaways to buy votes. Interestingly enough, had Hillary secured the nomination; she, instead of Barack Obama would preside over the bailout. So, where is that $8-bilion plus dollars? The Global Initiative people (code speak for car thieves) took my money; they stole my car. If you or I did half the things these people have done, we’d be serving consecutive life sentences. Let the bubble burst. Gentlemen, I want my money back:
Bob
Sep 30, 2008
I watched the CNN Ron Paul clip. I’m liking that guy more and more. For none other than the simple reason that he speaks the truth, no matter who’s in his face. I like that.
He thinks it’s all fixable though, and that is where I have my doubts. Twenty-five years ago maybe, but now, fixing it will be just as painful as letting it go. Both will be unbearable for the United States. If it could be done in isolation it would be possible, but there will be too many outside forces at work when the crash hits home.
He’s an optimist, wants to try and thinks that the American ideal is worth the effort. Nothing wrong with that. I admire the man.
Michael Hampton
Oct 01, 2008
It all can be fixed, but the politicians aren’t nearly ready to give up the control they would have to surrender in order to fix it.
Apr 03, 2009
Great Depression II - Homeland Stupidity