Bailout Nation: Obama and Congress Get F in Economics

About 11 months ago, the Bush Administration saw a financial tsunami headed its way.  

The Great Housing Bubble – built upon easy credit engineered by the then Federal Reserve Chairman Alan Greenspan – had popped.  

As the debt balloon imploded, it sucked in the banks, insurance companies, stock brokers, automobile manufacturers, retailers and housing manufacturers.  AIG, GM, Circuit City, Linins ‘N Things, Lehman Brothers, Countrywide Mortgage, Wachovia, Merrill Lynch… It almost swallowed the US itself.  

In response, the US Treasury and Congress rushed into law the ill-conceived $850 billion bail out bill (‘Bail Out I’) to pour money into the sinking financial system.  The solution to the problem was completely backwards.

The US Government should have cancelled the AIG funny money ‘derivative’ insurance contracts.  It should have re-installing the rational Glass-Steagall Banking Act of 1933 to undo the too-cozy relationship between banks and ‘investment banks’ (read: stock market gambling firms).  It should have re-instating the recently-cancelled SEC stock uptick rule for short sellers (which prevented speculators from pilling onto a self-fulfilling falling market).  It should have let the Fed handle the bank liquidity problem on its own.  

It should have kept its nose out of the marketplace.  It had already mucked it up a decade earlier by “encouraging” banks to create so-called “liar loans” of up to 125% with no money down – so that new younger, poorer and minority first-time buyers could get onto the home ownership ladder by getting over their heads in debt.

Instead, the government approached the problem: “Americans owe too much money and are up to their eyeballs in debt” with a wacky solution.  Washington issued waves of more government debt to bail out the market.  In other words, since the problem is that we’ve all suffering from too much debt, let’s pile on even more debt to bail us out!  Or, “I’m bankrupt, please lend me some more money to bail me out…”

In the winter of 2008-2009, Bail Out I was soon followed by a massive Fed intervention euphemistically called “quantative easing”, that is, they simply printed up more paper and electronic money, and starting a new buying spree swallowing toxic assets and worthless stocks and bonds owned by the banks.  

Soon it was Obama’s turn.  Bail Out II followed with another $900+ billion and Bail Out III ($2 trillion?) is gearing up to be released in 2010 when it is admitted that the massive government debt issuance is not yet working.

We’ll see.  

Now let’s do the numbers.  America is awash in debt.  The results are simply astonishing.  They will take your breath away.

By the end of this fiscal year (September 30), the Federal Government will have run up a 12-month new deficit of $1.5 trillion.  That’s $4.1 billion each and every day that the government spent more than it took in.  And the tax receipts are collapsing, down 20% from last year.  

The result is that the new Federal Deficit, the accumulated IOU’s of the federal government, has now exploded to over $11 trillion.  That $11,000,000,000,000.00.  Someone has to pay the interest on all that debt.  That someone is you.  And your children, grandchildren and probably great-grandchildren.

But wait, it gets worse.  Congress is proposing additional legislation: the farcical “cap and trade” bill, the national socialized universal health care plan, and a half-dozen other pieces of “progressive” (read: socialist-fascist) laws.  So, by 2020, some economists estimate that the federal debt will reach over $30 trillion.   At 4% per year interest, that’s $1.2 trillion annually.  Or, 41% of the 2008 federal budget.  Gosh, these numbers are breathtaking.  Just to pay the interest – not the principal even – on the national debt would mean that the government would have to eliminate the entire budgets for the US military and Social Security.  No more guns or butter…

But, you say, these numbers are exaggerated   OK.  Let’s just take some ‘conservative’ ones – linear projections of the non-partisan Congressional Budget Office.  Then, by 2014, we’ll only owe $15 trillion.  That’s much better.  So we can keep the military or Social Security – but not both.  Of course, if the interest rates jump up to, say, 10% by 2015, we’ll be back to killing off both.

Then there’s the crowding-out effect of the government sucking up so much money from the bond marketplace.  This means that the private sector: the Best Buys, Bed Bath & Beyonds, Bank of Americas, and Safeways will be hard pressed to borrow money at reasonable rates.  And when they do, they will have to pass along higher prices to the consumers.  If they can’t, then look for more bankruptcies down the line – and fewer and fewer consumer choices at ever-higher prices.  This won’t work.

So, look for the government to raise taxes big-time.  First, the Bush income tax cuts will be cancelled.  Personal taxes will jump back up by 20-30%.  It won’t be enough to fill the growing budget black hole.  Next, a national Value Added Tax or VAT, like the ones in Europe and Canada will be added to all consumer items.  A national sales tax of, say, 15% on top of the state sales taxes will be needed.  Still, this means that someone who lives in California will only be paying approximately 25% for the new combined sales taxes.  This is still cheaper than several European countries where they use the tax to pay for totally “free” national health insurance.  No problem.

Except taxes still won’t work.  Taxes crowd out spending.  Taxes crowd out growth.  Taxes cause GDP to stall or drop.  Taxes increase unemployment as consumers no longer have any money left to buy things.  Demand falls, sales fall, factories close.  And tax-free black-markets pop up everywhere.  

Think local flea markets in everything.  And lots more police to catch the cheaters – anyone who buys or sells anything without paying the local and national sales taxes.  Forget the Internet tax-free sales.  A new law is pending to wipe this loophole out too.

So what’s the real-world option left for the government to do?  

Inflate the money supply – and pay back the bills in worth-less dollars.  And if that doesn’t work (and it may not), isolate the overseas owners of US Treasury Notes (the majority of the holders?) from Americans.  Set up a “red/green” international/domestic dollar system.  Turn on currency controls.  Allow the international dollar to collapse and isolate it from the NAFTA dollar (which includes Canada & Mexico).  Limit the number of Americans who can travel overseas (or at least who can take money out of the country).  

Then there’s the Austrian economics way.  Cut loose the creative economic engine of America’s free market.  

Toss out federal regulations (the states have lots to go around anyway).  Unlock the freeze on opening up America’s massive oil, coal, and gas reserves.  Stop shipping America’s dollars overseas to buy energy from corrupt dictatorships and foreign potentates.  Venezuela comes to mind.  

Cut the size of the federal government by 40% by transferring its social and wealth-redistribution programs to the states. The local governments are closer to the people.  Cut the federal income taxes in half – and then in half again.  Get the federal government out of the business of “robbing Peter to pay Paul” – legal corruption of the voters and politicians continues the myth that there’s such a thing as a free lunch (as in “free national health care”).

So the choices are:  more taxation, more control, more government, more regulations, more federal spending, more inflation, less personal freedom.  Ultimately, this path leads to bankruptcy of the US Government.  It has happened before in the United States.  It has happened hundreds of times in the world –over the past century alone.  It will happen again.

Or, less taxation, less control, less government, less regulation, less federal spending, less inflation, more personal freedom.  Ultimately, this path leads to a free society of people growing ever more wealthy as responsible individuals.  In other words, that made America the world-leader and beacon of freedom "Give me your tired, your poor,
your huddled masses yearning to breathe free” of the Statue of Liberty.

Which way will the Congress and President – and the people – turn?  2010 approaches.


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