September 23, 2008
PJB: An Amnesty for Stupidity
By Patrick J. Buchanan
Is it fair that businessmen who fail in neighborhood stores have to close shop and often sell their homes, while Wall Street titans are spared the consequences of monumental stupidity and greed?
No, it is not fair. Yet, Treasury’s Hank Paulson may be right. To save the sheep who might have been wiped out in a general financial panic, we may have to save the pigs.
Life is unfair, said JFK.
Yet, this is going to be the mother of all bailouts. Paulson will be voted by Congress authority to spend $700 billion, 5 percent of our gross domestic product, to buy all that toxic paper stinking up the books of our biggest banks.
And this is not the first such bailout of foolish and incompetent financiers and politicians.
In 1975, when its cravenness to extortionate union demands had bankrupted New York, the Big Apple had to be rescued by Gerald Ford.
Marion Barry’s Washington, D.C., was next in line at the cashier’s window.
In the Reagan era, it was Chrysler. Later that decade, Citibank, Chase-Manhattan and Bank of America were staring into the abyss, as Latin American regimes, to whom they had lent scores of billions, were balking at paying their debts. Uncle Sam stepped in.
Then came the Mexican and Asian financial crises and the U.S.-IMF bailouts of the 1990s. The Mexican bailout was as much a rescue of Goldman-Sachs as Mexico City, as Treasury Secretary Bob Rubin’s old firm was choking on all its Mexican paper.
The great myth is that these 1990s bailouts were models of U.S. financial statesmanship and great successes. The reality is the U.S. workers took it in the neck.
For the countries bailed out, like Mexico, Thailand, Indonesia and South Korea, were forced to devalue. This radically reduced the wages of their workers relative to American workers, creating incentives for U.S. manufacturers to shut plants here and move them abroad. The devaluations also slashed the price of foreign goods relative to U.S. goods. Imports flooded in.
Who ultimately paid for the Mexican bailout? Florida tomato growers wiped out by Mexican producers, the price of whose tomatoes was chopped two-thirds by the devaluation. U.S. autoworkers who saw Ford and Delphi plants shuttered as new Ford and Delphi plants opened in Mexico. U.S. textile workers whose mills closed and jobs vanished.
Middle-class American families have paid and paid — in lost jobs, lower wages, a falling median income — to save the big banks from the consequences of their follies. And those bank bailouts are behind the trade deficits that set five records in the Bush era, reached 6 percent of GDP, forced huge U.S. borrowings from abroad and ravaged the dollar.
Having bailed out Latin America, Mexico, Asia and their U.S. creditors, we now find our own country in trouble. And how are our allies reacting?
“Europeans on left and right ridicule U.S. money meltdown,” ran the Los Angeles Times headline. Italy’s finance minister compares us to corruption-ridden Albania, where “a nationwide pyramid scheme cost hundreds of thousands of people their savings and ignited anarchic civil conflict” in the 1990s.
How will the bailout work? Will every bank that brings in toxic paper be able to dump it on the Treasury? Will the Treasury buy securities based on subprime U.S. mortgages from foreign banks? Apparently so. What about mortgage-backed securities held by U.S. companies and individual investors? Is there to be a general amnesty for bad judgment, or just a bankers amnesty?
About one thing we may be sure. The U.S. deficit and national debt are going to soar. The credit rating of the United States, as this nation of non-savers has to borrow abroad to save its banks, and their banks, is going to fall. We are going to be a poorer nation and people.
As for the promises and plans of Barack Obama and John McCain — be it for national health insurance or middle-class tax cuts — they are going by the wayside. For the United States is as bankrupt as Lehman Brothers, with this difference: Uncle Sam can still borrow from abroad because foreigners see many juicy U.S. assets they would like to take off our hands with their hoards of ever-cheapening U.S. dollars.
Looking at the federal budget — the five or six major items are Social Security, Medicare, Medicaid, defense and interest on the debt. All are going up, as tax revenues fall. Add the cost of two wars and a bailout of U.S. banks that some estimate will cost $1 trillion to $2 trillion, and we appear to be looking at budget deficits ad infinitum.
“There is a great deal of ruin in a nation,” Adam Smith once consoled a friend who lamented that Britain would be ruined if the 13 Colonies were lost.
We are about to test Smith’s proposition.
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I actually regard PJB’s analysis is somewhat optimistic. To begin with, the $700 Billion is simply a downpayment, in practical terms. Legislative limits on spending are inherently flexible and tend to travel in only direction; up. The proposed bailout is an economic coup d’etat, whereby decisions of the Sec. of the Treasury (Paulson) become unreviewable by any court of law or administrative agency (Sec. 8). Comparisons to past such bailout efforts, including the old RTC, are off the mark.
The affected institutions must be allowed to fail and to revalue according to the prevailing market conditions. The two year sunset provision? Please, let’s all recall the “temporary” emergency income tax withholding law passed over 60 years ago…..and operates to this day. Pain? Absolutely, but the Treasury plan represents far greater pain for a protracted period of time. The attitudes displayed thus far show similar government attempts to prevent something that cannot be prevented and, via their interventionist tactics, they will cause the necessary adjustment period to become far more protracted and painful than would otherwise be necessary; similar to the effects of intervention measures adopted by both Hoover and Roosevelt following the 1929 crash.
Given the attitudes of most of the body politic, the measure under consideration will most likely pass, with minor changes here and there, and the dollar will be toasted a golden brown after the election. As to some $1 or $2 Trillion liability, that only represents a drop in the bucket in terms of the potential liability further down the road. In trying to cover Paulson’s pals’ derivatives exposure, the U.S. taxpayers stand to be required to cough up a lot more than that and the bill will take generations to either repay or repudiate. The Fed has chosen inflation as their primary tool now. The burden won’t be put upon the taxpayers directly via a tax; their wealth will be extracted via the effects of the inflation tax, which is to say: higher prices among other things. After all, that doesn’t require passing a statute in Congress; the Fed can do that all by themselves. Saves the bother of having to be elected to office. Invested in U.S. dollar denominated securities? I would light a candle for you if that were my religion. Good luck.
Pat,
This is a great perspective on the origin of our trade imbalance that I (and many others) had not considered.
There were many roads to this revolting development and bail-outs seem to be a highway to middleclass disaster. I’m not a conspiracy monger, but I have to say, it looks an awful lot like someone wants to dismantle the American Middle Class. Recent events are looking more like engineered machinations rather than just plain stupidity.
If you want a great historical example of America screwing itself, take a look at the war of 1812. The post-colonial business leaders could be just as short sighted as our geniuses today. They decided that Americans were not competitive enough to make gun powder, they could save a bundle making it in India and shipping it to the US. I’m sure there were plenty of reassurances that this was good, sensible, business.
When war broke out between England and the US, it became painfully obvious that Britannia ruled the waves. Fortunately, enterprising Americans stepped up to the plate and mined phosphates in Mammoth Caves Kentucky and shipped the material to Delaware. There Éleuthère Irénée du Pont made gun powder for the war effort. In supplying the US Army he made sure that the US could fight.
We won (in case someone doesn’t know.)
It took resourceful individuals from the private sector, drawing on Yankee Ingenuity, to countermand the call to outsource our security.
It will take the private sector to rebuild our technological and industrial base again. An economy rooted in manufacturing and production provides a rock-solid foundation for our financial markets.
The tools of the trade are better than ever and we are more productive than anyone at any time – this is the time to invest in American know-how, not ship it out
A solid foundation doesn’t need bail-outs.
I think we should immediately annex Canada to the north (some rumblings will come from the French quarter but we can handle it) and occupy the oil regions of Mexico to the south, also the oil producing Lake Maracaibo of Venezuela ( there will be some casualties, but probably less that in Iraq/Afghanistan). Lets make a deal with Russia over Kazakhstan and pump money into Abkhazia (nice coast line) and south Ossetia ( I hear its like the Catskills) to keep them Russian and definitely pump a lot of money into Gaza/Palestine to develop it as the next gold coast of the Near East… oops that last one was just too fantastic, even for me, lol.
PS: Also sequester assets of these criminal financial ’smart’ guys and hedge fund managers! Also a pipe dream!
This action is no surprise to me. I believe the plan is to monetize all the debt in the United States.
The powers that be do not realize that this will
destroy the currency.
This is Socialism and it is what we have become.
Suggest you buy some Gold and silver.
Your paper currency will soon be worth less and less until it is worth “NOTHING AT ALL”
Dr W
The long term strategy is to realign our national focus to production of real goods and scale down finance back to simple and responsible proportions. We need to stop selling money and sell products, even if to ourselves.
The energy crisis is an excellent opportunity to reinvigorate labor and production in the country. We have the demand and workforce to rebuild our infrastructure to create jobs and a cleaner and independent energy policy.
Even if we are to stick with fossil fuels, we don’t have to go outside our borders to get it like therock humorously proposes. America’s oil shale reserves in Utah, Colorado, and Wyoming amount to trillions of barrels of crude oil and hydrocarbons. Yes trillions. Few people know we have more natural oil than the rest of the world combined through the Western oil shales. The problem has been that the technology to extract that oil is significantly more expensive than getting it out of the ocean floor or Persian Gulf. But when those other supplies run low, or American demand grows high enough, we’ll finally start making use of the “Saudia Arabia” within our own borders.
Whatever policy we pursue, it should avoid imperialism and more money hat-tricks that have made our economy a house of cards.
Of course I agree with Pat’s analysis.
So, for those readers who also agree with Pat’s analysis I recommend an excellent white paper on the domestic economic situation facing this country titled The Technology Misconstruct: Saving America’s Economy at http://paleoconservatist.blogspot.com/2008/05/technology-misconstruct-saving-americas.html
Long Term Capital, Enron, Bear Stearns, AIG… so who are the “smartest guys in the room” now?
This is Balco finance. A new financial instrument, dreamed up by a Ph.D. physicist (not joking) in the labs at the Chicago Mercantile Exchange, is sold to unsuspecting MBAs who don’t understand finance past the introductory courses, but want their year-end bonus check. One thing is certain after listening to politicians and regulators — nobody really knows what’s going on. The system is so complex, nobody can even explain the problem, let alone solve it.
afgI think we have to stop paying mortgage first, file a lawsuit against Bush and Cheney for corruption, negligence to protect interest citizens, and for setting up enormous money laundry machine called war in Iraq. He and Mr. Cheney have to be prosecuted and their assets ceased in favor of citizens they betrayed. War always has those to benefit from it.
Read numerous times that if the United States asserted its constitutional authority to control the Federal Reserve, as John F.Kennedy planned to do in 1963, that most federal government debt would be wiped out rather than endure that unsustainable $700 billion bail out that only begs for more bail outs in the future.
My problem with the bailout is this: The government wants to take on credit card debt and default swap debt. Aren’t these defaulted debt? And the default swaps are trillions of dollars.
I would like someone to answer me about how much this default swap paper, bets that mortgages would default or not, is going to cost the US government.
It seems like a slight of hand that Paulson is using to put a big trick over on Congress!
Wall street has become a weapon of Mass Destruction aimed at the world. The Titan’s will recover the little guy will get wiped out and it’s business as usual. I don’t like the words “Bail Out” that sounds like a freebee. How about low interest loan since it’s our money that is saving them and let’s recover it with some interest that can go towards our National debt that is now impossible to repay do to these same irresponsible politicians.
I hear both Parties blaming each other but didn’t Harry Truman used to have a plaque on his desk that said “The Buck Stops Here”.
George W. Bush’s legacy - The worst President in U.S. History. What a catastrophy.
Mr. Buchanan
Please do a review of Larry King Interview today with Pres of Iran. I am interested to hear your point of view.
Thanks.
MAY I SUGGEST A THOUGHT THAT THE REASON THIS BAILOUT HAS COME OUT OF THE BLUE, THAT THE ADMINISTRATION WANTS NO OVERSIGHT, CANT GIVE A REAL VALUATION IS THAT CHENEY NEEDS THE MONEY FOR ANOTHER OF HIS MILITARY MISADVENTURES.
Consider
Why haven’t our allies and trading partners chipped in if this is so serious. Do they suspect somethingelse
This happen right at the moment the President of Iran is at the UN and Bush’s speech is about the Financial meltdown and “tyrants”
LETS NOT BE FOOLED AGAIN
We have now gone beyond stupid. This is not free enterprise, it is socialism. More big govt. not for all of the people, but only for a few. The fact that these firms can and will be saved due to their own stupidity, is rediculous. I ran a small business for upward of 20 years, and I am 100% sure that the feds would not have helped me in my time of need. The only options I had were to borrow from those that have $. Are we as US citizens now going to each be stockholders of these companies? And if so, do I have the right to trade or sell this company when it is continuing to stink up the place. Or even better will I get a voting share, as not to allow a CEO or CFO to take me for another ride. If this country were run as a business, all of its current officers would be out on the street looking for work. It is obsurd that we continue to take this. Our country is heading for the quickest internal collapse that anyone has ever seen. If there is not a demand to begin to take care of ourselves soon, then that idiot in Iran will become the greatest fortune (or misfortune) teller the world has ever seen.
Was this moment in time (the collapse of the dollar et al) planned? FDR said “If something happens in politics you can bet that someone planned it to happen.” It appears that the elite of the financial world are steering us into a state of total subjugation where only the very rich will/are dictating how the rest of us will live. Is this what the New World Order has in store for us; the NWO so often talked about by our “esteemed” leaders and elite members of the world community?
There sure seem to be few who understand the stakes at all, or even how this plan might work. First, most in the business seem to believe that if it doesn’t pass, the consequences will likely be catastrophic, with huge numbers of banks and many other companies who rely on short term credit going bankrupt. If this is a reasonable argument (which I think it is, clearly) it seems to me it should trump ideological resistance of most any kind. Second, people who believe this will be throwing $700million down the toilet are ignorant, profoundly having confused cost with investment. Treasury buys $700million worth of paper - it is not worth zero. In fact, it seems more likely that by buying this paper, holding it for a while, and in so doing creating some sense of stability in these fractured markets will likely result in prices for such paper improving dramatically over time. Yes this is a risk, but it is logical, and in no way is it probable that this plan simply results in a $700million loss. Time for all to be a little pragmatic in here, as the potential outcomes of doing otherwise are far too bleak.
Easy enough to say that banks were stupid enough to lend to subprime borrowers but it was law, the Community Reinvestment Act (1977) that demanded that banks service beyond wealthy neighborhoods and lend to subprime borrowers. Affirmative action has painted government into a corner and government becomes morally responsible to bail banks out of the predicament that government got banks into.
We must act immediately!! “The last time I heard that line, I was on a used car lot,” said Rep Pence from Indiana.
If we act out of fear and intimidation, no doubt about it, we will leave the lot with a lemon.
Dear Mr. Buchanan,
May I separate out the distinction as I see it between Obama and McCain since the US is headed toward bankruptcy regardless of who occupies the white house.
Obama would pull back our nations international commitments to focus on domestic responsibilities at home. Yes, there would be more of a vacuum for other nations to fall or exploit and thus more global uncertainty but the US would be spending its money primarily on domestic programs. Yes there would democratic socialistic giveaways and bailouts of failed government programs.
McCain would (says he wouldnt but) everyone knows that McCain would ignore domestic issues just like Bush and it would be one international foreign policy issue after another, continued war, expansion of war, necon politics and bailouts of corporate america by the creation of false crises.
I have been leaning toward McCain up until this Presidential Debate where McCain didnt get it. The country is bankrupt and people dont want more money wallpapering over our crony corporations and more money for overseas trade, foreign aid and foreign wars.
McCain was old, creaky, aggressive and came off like a doddering curmudgeon gasping for relavance before he dies.
Obama gets it…we want the trains to run on time in the United States.
McCain doesnt…he wants the trains to run on time everywhere in the world except the United States.
Obama won another point and he correctly said that a nation that fails its home economy quickly loses the ability to project its military power.
And lastly, if McCain mentions Vietnam, POW or Israel one more time then Im definitely not voting for him. Jews are only 1% of the population. Contrary to the jewish lobbly no one cares about jews and sincerely no one cares about Israel either. Sorry but Vietnam and POWs do not buy you a free ticket to the sympathy of the voter, taxpayer or white house.
What McCain is showing, contrary to Obama, is that McCain is more posessed and controlled by the demons of neocons, Israel and foreign policy (aka foreign war) than Obama is posessed and controlled by the demons of minority victimization and socialism.
McCain may be the only person to embrace Russia or Iran but honestly they arent threats to anyone except Israel. No one cares.
Conversely, Obama may be the only person who can reform affirmative action, quotas, diversity entitlements, social security, medicare, healthcare, etc at a time when their share of the budget is a significant portion of structural deficit.
One last point, McCains solution to budget deficits in the debate was an across the board freeze or across the board budget cut, except for the military. So effectively McCain is asking Seniors and the poor to take the cuts while McCain continues wars in Iraq and Afghanistan, then expands into Iran and the Caucuses.
Im a republican and a conservative but McCain is coming off like a doddering insane neocon willing to emaciate our nation for his own aggrandizement.