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Will government bailouts spell end of dollar?

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  • Will government bailouts spell end of dollar?

    Saturday, September 13, 2008
    MONEYNETDAILY
    WorldNetDaily Exclusive
    Will government bailouts spell end of dollar?
    Exclusive: Craig R. Smith asks where it all ends
    Posted: September 12, 2008
    9:00 pm Eastern

    By Craig R. Smith
    WorldNetDaily

    We have seen, in the dead of night, three major government bailouts in the last year, none of which had more than a few days' positive effect on the markets. Each was done by powerful men in powerful places in the wee, small hours. At the end of the next day, a few were made rich while the many were handed the bill.

    First there was Bear Stearns. Then IndyMac bank. Fannie and Freddie followed rapidly. All engineered on Sundays while the markets were closed.

    How many more bailouts have to occur before someone asks the questions no one wants to ask? Is this a systemic problem and where does it end?

    It is no surprise to those of us who warned about the drunken credit binge on Wall Street that the day of reckoning would come. What we never anticipated was the reward in store for the gluttons who caused the damage.

    Bear Stearns was sold to JPMorgan on March 17; billions of equity was transferred to the balance sheet of one of the top five banks in America while the liabilities were guaranteed by the government (a.k.a. the taxpayers). Through the use of very complicated devices the government moved to save the system. The executives of Bear walked away with bonuses and severance packages. Disaster temporarily averted.

    On July 11, IndyMac was taken over by the government due to a "run on the bank" which depleted deposits literally overnight. With $100 million leaving each day, the feds had no option other than to shut the doors. The $52 billion FDIC rescue fund was tapped for $4 billion-8 billion to pay off depositors and 4,000 employees lost their jobs overnight as IndyMac became runnerup to the largest bank collapse in history (Continental Bank in 1984). The net result: the banking system is saved for the time being.

    Fannie and Freddie were seized by regulators Sunday after weeks of speculation that both were suffering losses far beyond their ability to cover. Voices like Bill Gross from PIMCO, with $800 billion in bonds, made clear their intention to stop buying bonds unless the Treasury acted to provide an implicit guarantee for all Fannie and Freddie obligations.

    By Monday morning, Gross and his firm are $8 billion richer and the American taxpayers take on potentially $200 billion-$700 billion in losses. I guess the slogan "E pluribus unum" took on a whole new meaning as 300 million of us (the many) united, involuntarily, to give PIMCO (the one) a whole lot of money.

    This is not unusual. The market rallied 300 points only to give it back the next day. But Fannie and Freddie did not fail; in the technical sense.

    But is the system broken? And if so, who benefits as a result? Did Paulson and Gross identify a weakness and capitalize on it?

    If the problems we are now witnessing are systemic and can potentially develop into a far worse crisis than anyone expected, what level of loss should the public be responsible for? Should we the people be on the hook for an unlimited amount of liability while not participating in any of the reward? At its face that seems very unfair but, I was told at an early age, life is not always fair.

    There is an even bigger question in all of this. How many commercial banks, investment banks and mortgage guarantors can the government take over before we as a country are forced to create money to meet all the obligations represented by these takeovers? It is not as if the government has surpluses from which to draw all the needed capital to meet these obligations. We will have to borrow or print it.

    What if General Motors, Ford and Boeing need to be bailed out? What about airlines, drug companies, insurance companies ... shall I go on? We cannot and should not adopt a bailout mentality without first considering the long-term ramifications for the country as a whole.

    Currently we are running about a $500 billion dollar annual budget deficit. This will be added to the national debt which currently stands at $9.6 trillion. Will we just run the national debt to $15 trillion, $20 trillion? And that doesn't even take into account the off-budget debt, reflected in future Medicare and Social Security obligations, which now exceeds $50 trillion. At what point will the U.S. dollar have any value if we can never pay any of it back?

    The U.S. dollar has always been the currency the world turns to when there is trouble. The dollar has always represented safety, but can it maintain that trust if we just continue to print, borrow and move dollars around from balance sheet to balance sheet ad infinitum?

    I have asked a number of questions so at this point it is appropriate to offer some answers.

    We cannot continue employing the broken business model our current financial system represents. It doesn't work. We cannot leverage, inflate and deflate forever. There comes a day of reckoning when people will not tolerate the abuse of a system to enrich a few while decimating many.

    I see vulnerability in America that must be addressed and time is of the essence.

    For the first time in the post-World War II era, the American dollar is susceptible to competition from a currency based in an identifiable and universally accepted value. A currency that cannot be created out of thin air. Is such a currency available? Not yet. But you know the old saying, "necessity if the mother of invention."

    Right now the world has three very strong and prosperous countries competing on the world stage with huge amounts of capital, natural resources and gold that could easily, if they so chose, create a currency much like Europe did in the Euro. But this time it could be backed with oil and gold.

    Russia, China and the Arab nations are sitting on an enormous amount of oil, gold and U.S. dollars. What if those nations forged agreements (much like NATO, WTO, etc.) and offered an "ARC" dollar fully backed by gold or oil? (The holder of the currency could actually exchange the currency for a specified amount of gold or oil).

    A Note is a promise to pay. For years in America a Federal Reserve Note (currency) was a promise to pay gold and silver at the Treasury. Today it is a note to pay debt. Debt that is exploding and can apparently be wiped away by the Fed overnight or, worse yet, transferred to the backs of American workers in the form of tax on future labor. But what if a group of nations offered a currency that had no recurring liability attached to it but actual "money" in the form of the ultimate currency (gold) or the ultimate natural resource (oil)?

    In the past I would have viewed such a prospect as preposterous. Today it may well become a reality. Currently talks are under way with the Gulf Monetary Authority for just such a system.

    If we think the government is capable of bailing everything and everyone out of every financial mess that may occur then we are fools. And perhaps we are being viewed as such by very hostile nations that would welcome the deterioration of our position on the world stage and would not flinch at our total demise.

    In short, we have fattened our hearts in the day of slaughter and now is the time to acknowledge and accept that each of us is solely responsible for our own future. Not the government. The time of discussing the problems has come and gone. Now is the time to devise a plan and put it into action.

    With gold and silver trading at levels 10% below stupid, it is time to put 10-20% of total assets into tangibles. Knowing that the only answer to avoiding a meltdown is either a new currency or runaway inflation. To quote Harry Shultz, "If Bush bails them all out, the die will be cast for inflation unseen in the west since 1923 Germany. If no bail:1929. Gold helps you out either way."

    You can either ignore the obvious or act upon it.

    Ignorance is produced in ignoring the facts. It makes one ignorant. Acting upon the facts makes one wise, which is wisdom. This will be a time when many will prefer to deny what they see around them and hope against hope that the system will fix itself.

    It will not.

    The best analogy I can give is a person (the system) having a massive heart attack, a heart attack resulting from years of abuse of the victim's own body. He is rushed to the hospital where the doctors (the Fed) work feverishly to save his life. They are successful and the patient lives. The doctors then sit the patient down and explain that while they saved his life, without major lifestyle changes, the patient will have another heart attack and die. He must immediately stop smoking, eliminate fatty foods and exercise daily. The patient refuses.

    And thus is our system. This is not the first crisis. It will not be the last. The system is not willing to do what is necessary to get better.

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  • #2
    I will beat Mick to the punch

    Curse those darn Jews. Wait, I am part Jewish. Curse me!!! And I thought that game of Risk I played last week with Greenspan, the Queen of England, Kim Jun Il, George Bush and King Hussein of Jordan was just a game. Darn it if wasn't for real!!

    Comment


    • #3
      End of the dollar...maybe. Every time the news carries more wallstreet collapse news I just go buy more 90% silver coins. My retirement stocks are a long term investment and the odds of them going 100% south are small.

      In the short term the fiat dollar is the US Government. If it collapses completely then what is left? I have MUCH more contact with my local community leaders and local police/city council/zoning commision than I ever had with the government.

      In fact outside of passport, mail and taxes I have been fairly clueless as most Americans are is my guess. Those who work for the government or have served in the military have much more to add I imagine.

      I've read enough history to believe we are the most fortunate nation in history. I can't imagine anything coming after this that would be half as good even with all the warts and diseases it clearly suffers from.

      Comment


      • #4
        It's like Herbert Spenser wisely observed: To save people from their own folly is to fill the world with fools. That is precisely what all of these government bail-outs are doing to our economy.

        All government interventions into an economy, whether taxation, regulation, or subsidy, create distortions and complications. And when those distortions and complications arise, the response is either to repeal the government cause or to increase government interventions to cure the distortions and complications. Too often, people don't immediately see the distortions and complications wrought by such government interventions, so they take the latter course.

        When government keeps tacking on more and more taxation, regulation, and subsidies, the end result is ultimately Totalitarianism such as what we seen in the Twentieth Century in the forms of Fascism, Nazism, Socialism, and Communism.
        "Apocalypse is by no means inevitable." --Jim Rice.

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        • #5
          I should add also that government cannot give that which it does not first take from someone else, whether the taking is in the form of taxation, eminent domain, nationalization, or devaluing of the currency. (Borrowing, of course, is just government taking deferred...but not forever.)

          When government bails out or subsidizes or favors anyone, whether it is Chrysler Motors, or farmers paid to not grow crops, or union workers given a monopoly "closed shop," or professionals given a monopoly via occupational licensing, it is always at the expense of someone else.

          Hence, the bail-outs of financial firms like BearStearns, FannieMae, FreddieMac, and AIG are at the expense of every other firm that offers investment or insurance, as well as at the expense of the consumer and taxpayer, who might could offer capital for other better enterprises and thus create a better economy.
          "Apocalypse is by no means inevitable." --Jim Rice.

          Comment


          • #6
            TUO,
            While I can agree with you on government intervention being disruptive if nothing else the last week has shown that subsequently removing those regulations without a careful analysis can be equally disastrous. The truth is that those who orchestrated this mess have now made THREE fortunes at the citizens of this great countries expense. I will try to explain and welcome corrections as I am only relating what I am being told here.

            The first fortune that was made was the selling of subprime mortgage commodities. Those who bundled these comodities knew that they were selling junk but who goes to jail...the home inspectors who were pressured to over inflate the values to qualify for jumbo loans.

            The second fortune were the gains made from short selling these same companies that bought these junk commodities. This was only possible because of the SEC's decision at the beginning of the year to perk up the economy by removing the restrictions on short selling of stocks.....half a year later the uncontrolled practice drove Lehmans, AIG and others to the point of disaster because they could not sell their stock to gain equity to save the GOOD parts of their businesses.

            The FED's decision to bail these banks out after they so recklessly gambled with insurining and owning/borrowing against subprime mortgage commodities (only available with the deregulation of mutual funds and the complete failure by the Treasury department to set limits) spelled disaster.

            Yes, if these banks had gone under FDIC would have been there to save everyone and dug an even larger hole for the tax payers to pick up but wholesale buying of this bad debt is only slightly worse AND it has the additional benefit of allowing the SAME hedgefunds who sold the dirty subprime mortgage commodities to make a THIRD fortune buying the depressed stock of these economic giants up again at bargain basement prices as they KNOW the US taxpayers will pay for any hidden dirt in the companies.

            Follow the money. Do you see anyone talking about investigating these people or SEC investigations? Nope everyone is happy again because they just earned back the VALUE of their retirement/savings stocks. 40-days before the elections and the Republicans just saved the economy!!!! Don't laugh when gas prices drop in the next few weeks, that will be hailed as EXCELLENT planning on the part of the government to protect the oil industry in South Texas.

            Cynical, yes.

            Comment

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