Some thoughts on the bailout

Economics Economics Questions
1

Here’s what occurs to me watching the bailout, and the crackdown on criticism of banks. It seems to me entirely unthinkable that this is about naive do-goodery - homeowners don’t have enough lobbyists for that. Instead, it seems that they are bailing out Fannie and Freddie because they need the inflation/debt system to go on longer. Why?

Here’s my story, tell me what you think of it. If I wanted to control the wealth of an entire nation, I could do it through artificially high debt levels. Inflation through the printing press can compel consumption and induce consumer credit, as well as artificial economic expansion. Temporarily, I can use the force of arms to get really cheap oil, so that an economy will be built entirely dependent on, well, cheap oil. Then as the price rises, savings decrease and spending increases, since the economy can’t react fast enough to the increasing prices.

I could build, well, Fannie and Freddie so that housing prices will double, triple, quadruple. Then I can ensure that a good portion of the population can’t afford their homes. They lie about their ability to serve a loan, and the bank lies to Fannie and Freddie. Then the government pours money into those 2 to keep it all going.

Keep it going long enough, and a substantial portion of the population cannot afford to pay their loans. Very few have any money, the vast majority are beyond broke. Now you stop the bailouts at this point, and take all their homes. They can have them back, though - if they agree to come work for you. Or just do it less dramatically - keep demanding more money on the debt they will never repay, and you’ll give them no choice but to work for the major corporations at whatever wage they are offered.

The problem is, I see clearly what I’m trying to say, but when I read what I write, it looks like leftist propaganda, not something a libertarian would think. Where am I going wrong, or am I? Any thoughts?

2

It kinda differs from “leftist” propaganda in that it doesn’t botch it up completely in identifying the source of the problem, which far from being free markets, is government itself.

-Jon

3

Well, I think leftists are right about corporations being greedy SOB’s who want to screw us over. Thing is, they can’t screw anyone over without big government’s help. So as long as you don’t forget that this wouldn’t happen on the free market, you’re plenty libertarian.

4

Sure, I recognize that government is THE problem. But I still feel odd talking about a plan for mega corporations to enslave the workers. Naturally, if they are to do that, they will do it by alliance with government, but still. I also feel like I’m coming out against debt, which I shouldn’t, but I don’t see how to phrase the above without talking about debt-slaves. What I’m really looking for is comments on the idea - am I going in the right direction?

5

It’s simple.

It’s an election year and most homeowners are also voters. They really don’t need a lobby because they are ‘we the people’.

Plus they sold the ‘housing prices always go up’ theory and average people losing wealth looks really bad in a managed economy. Bad management, time for a change…

6

I think malevolence should not be assumed where plain ol’ cronyism and powermongering will explain things quite nicely.

7

I heard tucked away in the new bailout bill is new authorization for the IRS to begin tracking ALL credit card transactions (of all citizens regardless if you being audited or not).

8

There are two theories that make sense: (1) conspiracy (2) greed and incompetence.

The conspiracy theory is that the Federal Reserve and financial industry are a deliberate attempt to loot and pillage the American people. If there really is such a conspiracy, it’s a resounding success.

There’s also plain greed and incompetence. Due to the Federal Reserve, real interest rates are negative. This means that banks have an incentive to load up on as much leverage as possible. If you borrow at 2% and buy bonds yielding 6% or assets that return 15-20%, then you’re practically guaranteed a profit. If you aren’t subject to margin calls during the bust, you’re guaranteed to profit eventually.

The people who write banking regulations are themselves financial industry insiders. It’s the “captured regulators” problem.

Negative real interest rates encourage banks to load up on leverage. The regulations allow for extensive leverage, with 10:1, 30:1, or even 200:1 leverage ratios.

However, during the inevitable bust, this means that banks are now technically insolvent. That’s no problem if you’re “too big to fail”. A large bank is allowed to continue operating even though it’s technically insolvent. The Federal Reserve causes massive inflation to bail out the banks.

The result is a massive transfer of wealth from the productive sector of the economy to the parasite/financial sector.

The banks are bailed out. They start loading up on leverage, causing another inflationary boom, and get bailed out again in the next crash.

As an individual, I can’t do the same thing as a big bank. I can only borrow at higher interest rates. I can’t use such high leverage ratios. When the market declines, I’m subject to margin calls. The rules of the economic game are biased in favor of banks and against individuals.

Is it a well-designed conspiracy? Is it plain greed and incompetence?

Either way, it’s wrong and needs to stop. The only way I can prevent the Federal Reserve from stealing from me via inflation is to boycott the Federal Reserve by using sound money, and by boycotting the income tax.