TOO BIG TO BAIL
by Bill Bonner
“Bankruptcy of Neo-Capitalism,” shouted a headline in Wednesday’s Paris press. Scarcely since Hitler blew his brains out has the type been bigger or the contentment broader.
Almost everyone everywhere is enjoying the show. Each headline brings more laughs. The financial markets give people neither what they expect nor what they want, but what they deserve. What a treat to see people getting it – good and hard.
Near to home, that galling “millionaire next door” – many will take pleasure in seeing his portfolio of stocks marked down. “Stocks for the long run,” he used to say, smugly; the silly old coot will be dead before his stocks come back! He’ll have to work until he drops dead, just like the rest of us.
On Wall Street, the masters of the universe – who had the pay slips to prove it! – are now getting blown up by their own debt bombs. The top five firms on Wall Street were thought to be “too big to fail.” But Bear Stearns has been blown to smithereens. Lehman is exploding into small pieces. Merrill ducked and missed the blast. Then, the last big capitalist desperadoes – J.P. Morgan and Goldman – waved the white flag. They petitioned the government to allow them to become regulated, deposit taking banks!
And George Bush will leave behind the biggest nationalization program in history. Surely, that’s worth a snide chuckle. The takeover of Fannie and Freddie alone leaves half the country living in what are effectively, government-subsidized housing projects. Meanwhile, the coordinated takeover of Wall Street, put together by his apparatchiks, left even the hardened lefties at France’s Liberation in shock and awe: “This enormous statist intervention...is the work of the most ideological and extremist administration that the US has ever had.”
How heartwarming to see that the meddlers and world-improvers get a second wind. It’s like driving around in a ’33 Lincoln...or throwing rocks at the gendarmes in ’68. The old, gray Bolshies feel young again! Impetuous! Brainless!
And every capitalist is behind the bail out program too. All over the world, markets are out – state-sponsored meddling is in. Free market principles are fine – until prices start going down!
And there’s the breathtaking chutzpah of it! After proposing a $700 billion program, in which the government buys up Wall Street’s mistakes – otherwise known as “cash for trash” – Henry Paulson says he had no choice: “We did this to protect the taxpayer,” said the former Goldman chief.
Even Russia got into the act. New to counterfeit capitalism, it’s getting the hang of it fast, pledging $20 billion in the fight to keep stock prices from falling to what they are really worth.
Then, not be left behind in general hysterical absurdity, SEC honcho Christopher Cox announced a list of 799 financial stocks on which shorting is banned until Oct. 2nd. In Britain, the FSA’s ban on shorting financial shares lasts until Jan 16. But Pakistan gets the King Canute Memorial Prize; by law in that benighted land, stocks can’t go below their August 27th close.
And what a bunch of numbskulls – Greenspan, Paulson and Bernanke! Every word they’ve said so far has been financial poison. “Greenspan relaxed about house prices...” reported the Financial Times in 2005. “Most negatives in housing are probably behind us...” said the same sage in October 2006. “We believe the effect of the troubles in the subprime sector...will be likely limited...” said Bernanke in March 2007. It’s “not a serious problem...I think it’s going to be largely contained,” added Paulson in April 2007.
But these are the same numbskulls who now say they are saving capitalism from itself. Ah, there’s the rub...amid all this giddy merriment is a serious threat. The feds have bailed out the bankers, the insurers, the mortgage lenders, and half of Wall Street. But who will bail out the feds?
Since 1971, the world’s money system rests on the dollar. And the dollar rests on nothing but faith, hope and the kindness of strangers. And while the full faith and credit of the United States of America is elastic, it can snap.
Last week, the price of gold popped up $120 in two days. Then, on Monday, it added another $43. Oil gushed up 44% in the space of barely a week. Investors felt the geyser of liquidity coming from Washington and beat a retreat from the dollar.
For the last 15 years, the U.S. money supply has grown about twice as fast as GDP. Federal government liabilities, meanwhile, have grown three times as fast. As a result, the USA now has more financial obligations than assets. It is, effectively, broke. Nevertheless, the debit side of its ledgers grow heavier and heavier. This year’s US government deficit will add about half a trillion. The US trade deficit is about $700 billion. The U.S. bailout plan will probably cost at least $1 trillion more.
Where will the government get that kind of money? There are only two possibilities – one honest and depressing, the other corrupt and alarming. Whether it borrows the money, or prints it up, the world enjoys no net increase in financial resources. Borrowing takes resources from projects that might have been worthwhile and diverts them to the losers. Interest rates rise, as a consequence of the extra borrowing; higher rates generally worsen the economic picture. And while the U.S. borrows, long term, at almost 5%, it lends at barely 2%. It’s like a bank that has gotten its business model badly mixed up. The more it borrows and lends, the faster it goes broke.
If, on the other hand, it merely prints the money – or if it creates it “out of thin air,” to use Lord Keynes’ handy phrase – the results are even worse. Inflating the money supply with new currency, a la Argentina or Zimbabwe, wipes out debts. But it destroys faith in the dollar and brings down the whole world’s money system.
Sooner or later, this is just what will probably happen. Not because capitalism doesn’t work – but because it does. Capitalism is doing just what it should do – it is separating fools from their money. But the fools vote. After a big bubble, there are more fools than sages...and, in the United States of America, more debtors than creditors. Sooner or later, Americans will realize that they are better off destroying their own money than preserving it...and that they would prefer to stiff their creditors rather than pay their bills. That is when deflation will gives way to inflation...and the world’s post-’71 dollar-based money system comes to an end.
“Bankruptcy of Neo-Capitalism,” shouted a headline in Wednesday’s Paris press. Scarcely since Hitler blew his brains out has the type been bigger or the contentment broader.
Almost everyone everywhere is enjoying the show. Each headline brings more laughs. The financial markets give people neither what they expect nor what they want, but what they deserve. What a treat to see people getting it – good and hard.
Near to home, that galling “millionaire next door” – many will take pleasure in seeing his portfolio of stocks marked down. “Stocks for the long run,” he used to say, smugly; the silly old coot will be dead before his stocks come back! He’ll have to work until he drops dead, just like the rest of us.
On Wall Street, the masters of the universe – who had the pay slips to prove it! – are now getting blown up by their own debt bombs. The top five firms on Wall Street were thought to be “too big to fail.” But Bear Stearns has been blown to smithereens. Lehman is exploding into small pieces. Merrill ducked and missed the blast. Then, the last big capitalist desperadoes – J.P. Morgan and Goldman – waved the white flag. They petitioned the government to allow them to become regulated, deposit taking banks!
And George Bush will leave behind the biggest nationalization program in history. Surely, that’s worth a snide chuckle. The takeover of Fannie and Freddie alone leaves half the country living in what are effectively, government-subsidized housing projects. Meanwhile, the coordinated takeover of Wall Street, put together by his apparatchiks, left even the hardened lefties at France’s Liberation in shock and awe: “This enormous statist intervention...is the work of the most ideological and extremist administration that the US has ever had.”
How heartwarming to see that the meddlers and world-improvers get a second wind. It’s like driving around in a ’33 Lincoln...or throwing rocks at the gendarmes in ’68. The old, gray Bolshies feel young again! Impetuous! Brainless!
And every capitalist is behind the bail out program too. All over the world, markets are out – state-sponsored meddling is in. Free market principles are fine – until prices start going down!
And there’s the breathtaking chutzpah of it! After proposing a $700 billion program, in which the government buys up Wall Street’s mistakes – otherwise known as “cash for trash” – Henry Paulson says he had no choice: “We did this to protect the taxpayer,” said the former Goldman chief.
Even Russia got into the act. New to counterfeit capitalism, it’s getting the hang of it fast, pledging $20 billion in the fight to keep stock prices from falling to what they are really worth.
Then, not be left behind in general hysterical absurdity, SEC honcho Christopher Cox announced a list of 799 financial stocks on which shorting is banned until Oct. 2nd. In Britain, the FSA’s ban on shorting financial shares lasts until Jan 16. But Pakistan gets the King Canute Memorial Prize; by law in that benighted land, stocks can’t go below their August 27th close.
And what a bunch of numbskulls – Greenspan, Paulson and Bernanke! Every word they’ve said so far has been financial poison. “Greenspan relaxed about house prices...” reported the Financial Times in 2005. “Most negatives in housing are probably behind us...” said the same sage in October 2006. “We believe the effect of the troubles in the subprime sector...will be likely limited...” said Bernanke in March 2007. It’s “not a serious problem...I think it’s going to be largely contained,” added Paulson in April 2007.
But these are the same numbskulls who now say they are saving capitalism from itself. Ah, there’s the rub...amid all this giddy merriment is a serious threat. The feds have bailed out the bankers, the insurers, the mortgage lenders, and half of Wall Street. But who will bail out the feds?
Since 1971, the world’s money system rests on the dollar. And the dollar rests on nothing but faith, hope and the kindness of strangers. And while the full faith and credit of the United States of America is elastic, it can snap.
Last week, the price of gold popped up $120 in two days. Then, on Monday, it added another $43. Oil gushed up 44% in the space of barely a week. Investors felt the geyser of liquidity coming from Washington and beat a retreat from the dollar.
For the last 15 years, the U.S. money supply has grown about twice as fast as GDP. Federal government liabilities, meanwhile, have grown three times as fast. As a result, the USA now has more financial obligations than assets. It is, effectively, broke. Nevertheless, the debit side of its ledgers grow heavier and heavier. This year’s US government deficit will add about half a trillion. The US trade deficit is about $700 billion. The U.S. bailout plan will probably cost at least $1 trillion more.
Where will the government get that kind of money? There are only two possibilities – one honest and depressing, the other corrupt and alarming. Whether it borrows the money, or prints it up, the world enjoys no net increase in financial resources. Borrowing takes resources from projects that might have been worthwhile and diverts them to the losers. Interest rates rise, as a consequence of the extra borrowing; higher rates generally worsen the economic picture. And while the U.S. borrows, long term, at almost 5%, it lends at barely 2%. It’s like a bank that has gotten its business model badly mixed up. The more it borrows and lends, the faster it goes broke.
If, on the other hand, it merely prints the money – or if it creates it “out of thin air,” to use Lord Keynes’ handy phrase – the results are even worse. Inflating the money supply with new currency, a la Argentina or Zimbabwe, wipes out debts. But it destroys faith in the dollar and brings down the whole world’s money system.
Sooner or later, this is just what will probably happen. Not because capitalism doesn’t work – but because it does. Capitalism is doing just what it should do – it is separating fools from their money. But the fools vote. After a big bubble, there are more fools than sages...and, in the United States of America, more debtors than creditors. Sooner or later, Americans will realize that they are better off destroying their own money than preserving it...and that they would prefer to stiff their creditors rather than pay their bills. That is when deflation will gives way to inflation...and the world’s post-’71 dollar-based money system comes to an end.
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