How strong is the full FAITH & CREDIT? | The bailout will not stop the demise of our economy
INSIGHTS by J. Howard Crews 28sep08
I have little doubt that if Congress fails to bailout the Wall Street giants our economy will seize up, with catastrophic consequences for the middle class and poor people. The smartest men on Wall Street have so heavily leveraged risk that seizure is all but certain.
I also have little confidence that the bailout will fail to cure anything. It will only delay the inevitable decline and be more like a slow motion crash.
Hank Paulson is a Goldman Sachs man. He thinks like a Wall Street man. He is incapable of understanding the suffering and stress of ordinary people. Many of the brightest economists,some Nobel Prize winners, believe the $700 billion will be sucked into a black hole by all the toxic debt (caused by levering and complex derivatives). Very few are asking what happened to all the money? How did so much money just disappear? Well, it was not real money anyhow. It was just paper money, not backed up by anything concrete or tangible, such as gold or commodities.
I listened to a White House financial spokesperson say Saturday that of course our currency is not backed by tangibles -- "it is back by the full faith and credit of the U.S. government."
FAITH & CREDIT? Should that make me feel secure? This is not just a housing crisis. It is a CREDIT crisis. Recently the LA Times carried an article stating that even banks cannot get loans from other banks. Even strong, profitable corporations cannot get credit. It has become very difficult now for the small businesses on Main St. to get credit to buy supplies, real estate or equipment for a business. So we see that the CREDIT element is pretty much shattered.
All we have left, then, it the FAITH part. And from what I am sensing, 95% of Americans no longer have faith that our government knows how to conduct its financial affairs. Foreign banks and treasuries have grown deeply distrustful of making further loans to our treasury. So if there is no CREDIT, and no FAITH, then our currency is in grave danger of collapsing regardless of the bailout.
Originally we were led to believe this was a housing crisis, caused, they said, by naïve and irresponsible homeowner who did not read or understand their mortgage contract. And of course the brokers and lenders never lied to anyone, nor obfuscated the 60 pages of a mortgage documents. Now we realize the so called "mortgage crisis" was just a side show. The cause of our financial meltdown has been caused by GREED of shrewd market manipulators, not by stupid or irresponsible homeowners.
I give you an simple, if imperfect, analogy: A gambler goes to the Public Treasury, borrows a million dollars for a low interest rate, and takes the $ million to Las Vegas. The Casino permits him, with the deposit of the $1 million to make a reasonably bet on a highly celebrated horse, "Perpetual Housing", for $15 million. Why would the Casino let him do this? (1) Because he has a history of excellent CREDIT, and has always paid his betting losses in the past, and he has a reputation of great wealth. ("We are the richest nation in the world".) The Casino has FAITH in him. (2) Furthermore, the betting odds are historically modest, and the Casino believes he has reasonable chance to win, though the casino knows it has better odds. (3) And finally, he has 15 cosigners who back him up. There is full FAITH and CREDIT with backup insurance. The gambler (bank or brokerage) has an elaborate network of mutual backers. Nothing seems possible to go wrong. But something does go wrong, and the gambler loses $15 million, but it turns out that all 15 of the cosigners have also cosigned for 15 other gamblers, all betting on that horse, "Perpetual Housing". So for the $1 millions dollars, we now have additional debt of 15 X 15 = $225 million. All they can cough up is a few million.
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