Quote: At first glance, anyone who understands economics can see that there is something wrong with this [bailout] picture. The taxes that will need to be levied to finance this package may keep some firms alive, but they will siphon off capital, kill jobs and make businesses less productive elsewhere. Increasing the money supply is no different. It is an invisible tax that redistributes resources to debtors and those who made unwise investments. So why throw this sound free-market analysis overboard as soon as there is some downturn in the markets?

The rationale for intervening always seems to centre on the fear of reliving the Great Depression. If we let too many institutions fail because of insolvency, we are being told, there is a risk of a general collapse of financial markets, with the subsequent drying up of credit and the catastrophic effects this would have on all sectors of production. This opinion, shared by Ben Bernanke, Henry Paulson and most of the right-wing political and financial establishments, is based on Milton Friedman’s thesis that the Fed aggravated the Depression by not pumping enough money into the financial system following the market crash of 1929.

…

For decades, Austrian School economists have warned against the dire consequences of having a central banking system based on fiat money, money that is not grounded on any commodity like gold and can easily be manipulated. In addition to its obvious disadvantages (price inflation, debasement of the currency, etc.), easy credit and artificially low interest rates send wrong signals to investors and exacerbate business cycles.

Not only is the central bank constantly creating money out of thin air, but the fractional reserve system allows financial institutions to increase credit many times over. When money creation is sustained, a financial bubble begins to feed on itself, higher prices allowing the owners of inflated titles to spend and borrow more, leading to more credit creation and to even higher prices.

As prices get distorted, malinvestments, or investments that should not have been made under normal market conditions, accumulate….

During that manic phase, everybody seems to believe that the boom will go on. Only the Austrians warn that it cannot last forever, as Friedrich Hayek and Ludwig von Mises did before the 1929 crash, and as their followers have done for the past several years.

Now, what should be done when that pyramidal scheme starts crashing to the floor, because of a series of cascading failures or concern from the central bank that inflation is getting out of control? It’s obvious that credit will shrink, because everyone will want to get out of risky businesses, to call back loans and to put their money in safe places. Malinvestments have to be liquidated; prices have to come down to realistic levels; and resources stuck in unproductive uses have to be freed and moved to sectors that have real demand. Only then will capital again become available for productive investments.

Friedmanites, who have no conception of malinvestments and never raise any issue with the boom, also cannot understand why it inevitably leads to a crash. They only see the drying up of credit and blame the Fed for not injecting massive enough amounts of liquidities to prevent it…. Injections of liquidities started more than a year ago and have had no effect in preventing the situation from getting worse. Such measures can only delay the market correction and turn what should be a quick recession into a prolonged one….

The confusion of Chicago school economics on monetary issues is so profound as to lead its adherents today to support the largest government grab of private capital in world history. By adding their voices to those on the left, these confused free-marketeers are not helping to “save capitalism”, but contributing to its destruction.

Here is a link to this thought provoking article:
http://network.nationalpost.com/np/blogs/fpcomment/archive/2008/09/29/bailout-marks-karl-marx-s-comeback.aspx

Michael

“The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources.... Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.”

Here is a link to the article:
http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html?iref=mpstoryview

Michael

Amid all of the other news of the day, the bailout that did not pass, at least today, and the markets that were expecting passage of the bill which fell sharply (DJIA falls by 777 points), there is also news of a loan guarantee package for US automakers. It would evidently include not only Ford and GM and Chrysler, but also foreign firms that had US plants for over 20 years. That would include Honda and Nissan. On one hand, this bill could be called creeping social-ism; on the other, it is probably much needed relief for an industry which actually makes a physical product, unlike some financial firms which trade in “financial products” which were unheard of ten years ago.

“The US Senate Saturday approved 25 billion dollars in loan guarantees for the financially strapped US auto industry, intended to spark a wave of automotive innovation.

The loan guarantees were included in a continuing resolution that included funding for the US government and the wars in Iraq and Afghanistan.

President George W. Bush has indicated that he intends to sign the bill. …

"We're very pleased Congress has chosen to act at this critical time," said Greg Martin, director of communications for General Motors Corp's Washington office.

GM had been subject of much speculation that it could be forced into bankruptcy.”

Here is a link to this article:
http://www.breitbart.com/article.php?id=080928164938.dtc44u1c&show_article=1&lst=1

Michael

“The FDIC in a press release stressed that Wachovia did not fail. Citi will take the hit for up to $42 billion of losses on a $312 billion pool of Wachovia loans, while the FDIC will take responsibilities for additional losses. It granted the FDIC $12 billion in preferred stock and warrants for assuming the risk.

Citi, in a separate release, said it will pay Wachovia $2.16 billion in stock and assume its senior and subordinated debt, totaling approximately $53 billion.

Additionally, Citi said that it would raise $10 billion in common stock and cut its quarterly dividend in half to 16 cents a share. Citi's Tier-1 capital ratio is expected to be 8.8% upon completion of the deal, it said. …Citi is acquiring more than $700 million in assets through Wachovia's banking operations. It will be responsible for the first $30 billion of losses on Wachovia's loan portfolio and will record them under purchase accounting when the deal closes, expected to be completed by the end of the year. The company will then be responsible for the next $12 billion of losses up to a maximum of $4 billion a year over the next three years.”

Here is a link to this article from TheStreet.com:
http://www.thestreet.com/story/10439747/1/citi-buys-wachovia-banking-operations.html

Michael

PS One interesting note I read said that Citi may end up under the 700 billion bailout legislation being able to sell the bad loans it is buying from Wachovia to the government for more money tomorrow than it paid today….stay tuned. M.

The Federal Reserve has announced that it will again make more and more money available for “cash starved banks” both here and abroad (?!). This continues and expands again the same policy that the Fed has been pursuing for months. One could gather that so far this policy has not worked as it seems necessary to keep pumping more money toward financial institutions, even though they continue to fail.

“All told, the total amount of cash loans -- 84-day and 28-day -- available to banks will double to $300 billion from $150 billion, the Fed said.

Moreover, the Fed will make a total of $620 billion available to other central banks, expanding ongoing currency "swap" arrangements with them where dollars are traded for their currencies. That's up from $290 billion previously in such arrangements.

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Swiss National Bank and the central banks of Denmark, Norway, Australia and Sweden are involved in those swap arrangements.

The move comes as the U.S. financial meltdown's tendrils have ensnared banks in Britain, the Benelux and Germany.”

Here is a link to the article:
http://biz.yahoo.com/ap/080929/fed_credit_crisis.html

Michael