Monday, September 29, 2008

The Bailout

"I place economy among the first and most important virtues, and public debt as the greatest of dangers. To preserve our independence, we must not let our rulers load us with perpetual debt."
-- Thomas Jefferson, 1743-1826

As usual, the questions around the proposed $700 billion bailout of incompetent bankers is not whether the bailout should occur at all, but in what form. No one is asking the basic questions: why should we create $700 billion more money (debt) which will further fuel inflation, to bail out the private banks whose greed caused the problem in the first place? Even more basic, why should the U.S. government pay a private bank, the Federal Reserve, merely to print and create money?

The U.S. government is quite capable of doing that. The interest on the national debt this year (2008) is an astonishing $600 billion! That money goes directly to the private shareholders of the Fed, most of whom are foreigners. And what does the Fed do in return? Create more money, print more money, and keep track of the amount of money that has been created.

Here is a chart of the interest payments on the national debt from 1988:

Chart of interest on national debt
Source: National Debt & Interest Payments For Fiscal 2008 ... iscal-2008

Add up the figures: since 2000, taxpayers have paid over$ 2.8 trillion dollars to the Fed, just in interest. Add the $600 billion for 2008 and you get $3.4 trillion dollars in interest payments. With $3.4 trillion we could have completely overhauled our decaying infrastructure, and paid off 1/3 of our 9 trillion national debt. The first solution to our fiscal and banking crisis is to abolish the Fed.

“We need the bailout to save banks from collapse,” is the argument. “Do you want to lose all your money? “ Well, here’s a suggestion: if we’re going to create $700 billion in new fiat money, why don’t we distribute that to the citizens instead of the banks? That’s $2,300 million for every man woman and child in America. This suggestion has been going around the internet the past couple of days, and on the surface it seems attractive, but it wouldn't do much to solve the problem.

Bailouts make no sense when the Federal government is spending 3.3 trillion every year. Every dollar that government spends is one less dollar in the hands of citizens, who will vote for the best products and services with their pocketbooks, and who will create new companies that employ people and pay them.

It is time to abolish the privately owned Federal Reserve bank and place the creation of money back in the hands of government, where it belongs. It is time for citizens to DEMAND that our government balance its budget, and spend LESS each year, not more. Unless we do this, the world will experience a hyperinflation followed by a depression. In a depression, the value of currency finds its true value relative to the production of goods and services. Government interferes with the people’s regulation of the economy. The Securities and Exchange Commission must be funded and staffed with competent people who will oversee the securities industry and punish those who violate securities regs. We must once more put up the wall between banks and the securities industry.

How did the Mortgage Crisis come About?

Banks traditionally lent money to people and added that loan to their portfolio. So they had every incentive to lend to people who could pay, because they serviced their own loans. If a borrower defaulted, the banks lost out. The so called “mortgage crisis” occurred when Congress, lobbied vigorously by banks, tore down the barrier between banking and securities.

What banks did was to package a bunch of loans together into investment vehicles, and sold those loans to third parties around the world. That’s what securitization is. Securitization is a structured finance process, which involves pooling and repackaging of cash-flow producing financial assets into securities that are then sold to investors. A security is simply a fungible, negotiable instrument representing financial value. A typical security is a stock (equity security) or a bond (debt security). A fungible asset is simply one that can be broken down into separate units and exchanged one for the other, like crude oil –– one barrel of oil is worth the same as another barrel of the same oil– or electricity –– 1 kilowatt hour of electricity is worth the same as another kilowatt hour of electricity, or a stock ––1 share of preferred stock in XYZ company can be exchanged for another. (see Wikipedia for some good definitions).

Now banks had no incentive to lend to those who could pay. Banks sent mortgage brokers all over the country, lending to every Tom, Dick, and Harry with a dollar in his pocket. “What do we care whether our loan portfolio is solid? We’re getting paid when we sell our mortgage portfolios to the investors.” Banks created “sub–prime” mortgages, which induced people to buy houses that they really couldn’t afford. That’s part of the reason that, as Mr. Bush put it, “Wall Street got drunk.”

I encourage everyone to go to and read the bailout bill. It’s posted right on the website. Find out what the government and Congress are doing with your money! Every dollar that is spent in a bailout is one more dollar of debt that is added to the money supply, creating more inflation. Remember, hyperinflation leads to depression, as the economy adjusts and prices find their true balance.

If you do nothing else, educate yourself about money by seeing the excellent You Tube movie “Money as Debt.” Just type in “Money as Debt” into your favorite search engine. The movie is only 47 minutes long and is well worth your time.

We must stand up as citizens and make our government accountable. The first step in that process is self-education about money, banking and finance.

Kenneth James Michael MacLean

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