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I ran across this in today’s Daily Reckoning.  It’s a snip from Bill Bonner’s article titled

The Fall of Wall Street: Innocent Frauds and Armed Robberies

It’s good stuff!  Please take a minute to read it because it explains a lot in just a few paragraphs.

gk

From the day of its founding in 1913, the Fed’s assets – the foundation capital of the U.S. banking system – grew, reaching $1 trillion on the 24th of September, 2008. But then, something extraordinary happened. Something breathtaking. And for a classical economist – something incredibly reckless. In the next six weeks, the Fed added another trillion. And the head of the Dallas Branch of the Fed said that he expected to add another trillion before the end of the year.

How does the Fed get these “assets?” Simple. It buys them. Where does it get the money to buy them? Simple again: it creates it. It makes it up. It conjures it out of nothing.

“If it comes from nothing,” you might wonder, “what could it really be worth?” But we’re not going to answer that question. We don’t have time. Besides, it takes us in such a deep metaphysical swamp, we’re afraid we may never slosh our way out…or at least not get out in time for lunch. Instead, we’re going to answer this question:

“If it was that easy, how come the Fed didn’t do it before?”

The answer to that is simple: because when the Fed inflates the money supply it risks inflating consumer prices. People don’t like that. They like it when asset prices go up. But not when gasoline and milk increase.

But now, no one is worried about consumer prices. In fact, the Fed is worried about deflation…about falling prices. Bernanke knows what happens when consumer prices begin to fall. Consumers stop spending – knowing that they will be able to get a better deal in the future. That further depresses the economy…and pretty soon it’s the ‘90s again and you’re back in Tokyo. So the Fed has begun a huge program of monetary inflation, intended to offset Mr. Market’s price-cutting.

And now another question: Isn’t there some risk that the Fed will overdo it?

Oh, dear reader…that’s a puffball of a pitch. If we can’t hit that, you can take our laptop away…you can break our sword…and send us back to the dugout.

Remember what happened in the slump of the early 2000s? Alan Greenspan panicked…cut rates to 1%…and left them there for more than a year. He gave the market the wrong medicine at the wrong time…and then delivered such a horse-sized dose, it set off the biggest bubble in mankind’s whole bubbly history.

Now, it’s a different kind of slump…a credit slump. And once again, the Fed is on the scene, like a quack doctor at the side of a heart-attack victim. This time, he’s giving stronger medicine…not just a 1% lending rate, but actual monetary inflation. Trillions of dollars worth of it.

For the moment, Mr. Market is taking away dollars faster than the Bernanke Fed is replacing them. That could continue…for a few months…or even for several years. But it won’t continue forever.

And here, we affirm our unshakeable faith in the people who lead us. They are trying to cause inflation. Eventually, they will get the hang of it. They may shoot for 2% per year; but they are sure to overshoot. Money printers always do.

I don’t know where to start….  Let me get this out of the way - I think the $700 billion bailout of Wall Street banks is a bad idea.  A very bad idea.  A very bad idea for many reasons.   I’ll try to explain some of them.

For starters, here’s what the Telegraph in the UK thinks of the bailout.  The headline reads: Bail-out enslaves US taxpayers Here is how the story starts:

“To preserve their [the people's] independence, we must not let our rulers load us with perpetual debt. We must make our selection between economy and liberty, or profusion and servitude” - Thomas Jefferson

There was a time, early in America’s history, when its leaders believed in financial discipline. No more. Perpetual debt, which Jefferson feared would enslave future generations, is clamped on Uncle Sam’s undercarriage like a ball and chain. US public borrowing is $9.8 trillion - and rising.

Jefferson, America’s third president (1801-09), is widely regarded as the White House’s most intellectually gifted occupant. He believed that “banking institutions are more dangerous to our liberties than standing armies“, and that “the principle of spending money to be paid by posterity … is but swindling futurity on a large scale.”

I couldn’t agree more.  But my opposition to the bailout goes deeper than simply agreeing with a long dead President about the dangers of debt.  It’s a philosophical disagreement that goes to the roots of the principals that our country was founded on.

I don’t think the Federal government should be involved in bailing out private companies - or homeowners.  We have not granted the Federal government the right to regulate executive pay, decide which companies get preferential treatment regarding loan rates and terms, or decide which group of citizens (or companies) receive direct government buyouts - or indirect preferential write offs of bad debt.

In other words, it’s unconstitutional.  I hope someone has the guts to file a suit and get the case heard in court.

So if this is such a bad idea, why do stocks rise whenever it looks like a deal is close?  That’s easy.  Stocks (especially financial stocks) stand to gain if the US taxpayer takes away their bad debt.  But we (the US taxpayer) are stuck bailing out companies (and people) who made stupid decisions.

Here’s my plan - let them go broke.  Let the companies that made (and sold) these stupid investments go broke and disappear.  Let the people (and companies) who bought these toxic investments go broke.  Kick their stupid, bought-more-house-than-they-could-afford-asses out of those houses.  Let the banks go broke and disappear.

Others - who have managed their money responsibly - will be here to buy up the houses and the toxic debt.  Yes, they will buy the houses and the debt at pennies on the dollar - so what?  Broke companies and people can’t buy stuff anymore - that’s a good thing!

We’ve been collectively living beyond our means for way too long. It’s time to get our budgets balanced - personal and government so we can pay off old debt and get moving forward again.

One other thing - the government doesn’t have $700 billion to use to bail out these stupid assholes.  We will have to borrow it.  That will increase the debt buy trillions by the time it’s paid off - and we already owe over $10 trillion at the federal level alone!

I’ve emailed my congressman and senators to let them know how I feel.  I encourage you to do the same.  Speak up - maybe we can stop this crap before it gets passed.  If you don’t email, call, or fax your representative - shut the fuck up and don’t bitch about the economy, congress, or Wall Street.  You’ve forfeited your right to complain.

gk

Just had to pass this on.  Excellent write up of the financial issues facing Wall Street and (though I disagree with some of it) Allan Sloan does a good job of breaking down a complex subject.  Highly readable and highly recommended.

gk