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One of the dominant myths of America is that we practice one of the freest forms of capitalism on the face of the planet. Hard work and prudence are rewarded, while Schumpeter's 'creative destruction' quickly cleans out the mistakes.
Unlike most myths, this one apparently lacks a kernel of truth at the core.
As the details emerge over the various bailouts and market distortions, it is becoming clearer that moral hazard has been increased, not lessened, and that those who behaved prudently during the credit bubble insanity are going to be punished.
Some are getting angry:
And in offices around the country, bankers simmered.
Peter Fitzgerald, chairman of Chain Bridge Bank in McLean, said he was "much chagrined that we will be punished for behaving prudently by now having to face reckless competitors who all of a sudden are subsidized by the federal government."
At Evergreen Federal Bank in Grants Pass, Ore., chief executive Brady Adams said he has more than 2,000 loans outstanding and only three borrowers behind on payments. "We don't need a bailout, and if other banks had run their banks like we ran our bank, they wouldn't have needed a bailout, either," Adams said.
Free markets? Fair competition? No, not really. Not at all.
This next article puts that in high relief. The Fed was going to buy corporate paper in an attempt to loosen up the flow of money in those markets, which would have been an admirable goal, in and of itself. But the Fed, for some reason I do not yet know, decided to insert a massive distortion into the market at the same time.
Fed officials yesterday set the yield they will pay for commercial paper at about 1.6 percentage points less than the average cost for financial companies, weekly central bank data show. Policy makers last week announced emergency plans to buy the securities after the market shrank to a three-year low.
The discount cuts the cost of cash to 2.2 percent from 3.7 percent for General Electric Co. and from 4.7 percent for Citigroup Inc., data compiled by Bloomberg show. One possible unintended consequence: private buyers are shut out.
Citigroup has a gigantic "Level 3" asset pool of more than a trillion dollars, and the free market decided that, because of the additional risk associated with those past decisions, Citigroup should pay a higher rate of interest on their debt. The Fed has now decided that Citigroup and GE (a very sound company) should pay the same rate to borrow. What's next? Dictating that everybody should pay the exact same mortgage rate? Isn't that exactly what got us into this mess in the first place, a distortion of the market's ability to properly price risk?
The Fed may have had good reasons for this, but it is one more very large intrusion of the government into a formerly free market. Such interventions distort true pricing, and it is a virtual certainty that the Fed will both subsidize this market and end up the owner of a lot of defaulted debt. This monetization of bad debts is among the most inflationary of all possible Fed actions.
And even as real problems mount in the real economy, all of the Treasury Department's and the Federal Reserve's attention seems to be focused on the banking system, to the almost complete exclusion of the needs of regular people.
To put all this in context, I am going to repost a snippet from a comment made yesterday by reader Davec007 (Dave Cohen):
I have not commented up to now, but now that we see the trajectory of the Fed's "intervention", I have a few things to say.
From an energy perspective, it is now clear that any adequate response to the oil supply/price problems we will have after this U-shaped recession is over will be impossible. Most of the funds that might have been put into infrastructure changes (long-haul railroads, light rail, restructuring the geography of living & work, adding large amounts of renewables to the grid, etc.) have already been given to the banks.
The "save Wall Street to save Main Street" rhetoric has not only served to facilitate one of the largest rip-offs in history, but it has doomed the "real economy" to a state of perpetual recession, or worse. We had a taste of Things To Come when oil hit $147/barrel, and we had another in the last few weeks when crude oil production in the United States fell below 5 million barrels per day for the first time since 1946. This latter was due to the hurricane disruptions, but such production numbers will become routine after 2012. You read that correctly -- since 1946.
I only wish and hope that when our true emergencies in energy and infrastructure are made clear to the DC crowd, they respond with the same urgency and magnitude as they have in their near-immediate multi-trillion dollar bailout of the reckless and the imprudent.
- cmartenson's blog
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The events such as this lead me to conclude that behind the scene is an agenda. The agenda appears to portend a world where nation states are diminished and a global state is pushed forward. America the super state must diminish for this agenda to move forward. The international banking cartel and her elitists that are behind their administrators are maneuvering for a checkmate.
Ron
Thanks for the article Chris. I wonder what if anything can we do about it? Do we (or DC) really have to wait till things get too bad to fix before action can be taken? Is seems exceptionally bad that prudence is punished in a time when prudence needs to be encouraged. The real problems are just starting and the world is putting itself in to a worse position to deal with the coming storm. I don't hear anyone in Washington speaking to the real issues that confront us.
By the way, we should probably stop calling ourselves taxpayers when we complain about the money that is being spent. We aren't paying taxes for these bailouts, we are borrowers, the government is borrowing in our name, and when I see the trillions of dollars we owe and compare that to the size of our economy (even when it was running hot) I don't see how we will ever pay that money back. The government is making us defaulters, either directly,or with inflation/hyperinflation. So as a defaulter who's not happy about it, I wonder what I can do.
This time, like all times, is a very good one, if we but know what to do with it. --Ralph Waldo Emerson
One big question is what will the banks do with the funds (after exorbitant executive pay and bonuses for screwing up)?
All viable long-term energy solutions include substantial increases in domestic drilling if for nothing more than the transition to alternatives. History demonstrates that energy transitions take 60 years (Mann, 2000; Bromley, 1994). The most accelerated program (for which there is no money) might achieve some meaningful energy transistion in a 20-30 year timeframe if the delapidated patchwork electric grid can be overhauled. Therefore near-term drilling can produce energy we'll need in the (dreaded) twenty-teens.
BUT... Nancy P & Co. have cheerfully identified the oil companies as a source of financial support for their wish-list. It should be recalled after the apparent successes of the oil companies in 1973-74, an "excess profits" tax was imposed, this during a period of high inflation and rising interest rates. The oil companies became severely strapped for capital, which limited exploration and development and brought the second oil crisis in the same decade.
Not that the Imperial Congress knows or pays any attention to history.
plant your garden and keep your powder dry
Chris,
My question now is how does this change the timeline of events to unfold, especially since the rest of the G7/G20 is following the same trajectory in bailing out the banks/bad behavior. I would assume this would almost guarantee the hyperinflation here in the US, but does this mean that the currencies of the rest of the world will also suffer same? Can you extrapolate from what unfolding presently to give us an idea how you see this playing out?
Let's inject one other point that we are overlooking.
The banks we are talking about being prudent are regional banks that did not grow past there ability to manage their own business. That is intelligent as a business person. That does not mean they have a lot of power.
The more people you have, the more money on the balance sheet, the more power you wield to hurt the community around you.
If General Motors goes belly up. 10's of thousands of people go out of work nationwide. The government will step in and help. If mom and pop's store goes under, not many people will care.
It is the same here with the banks. They go down, it effects our national community.
Should this actually happen in a free market? Darn right, there is a natural cycle that happens with a lot of pain but all will be better when the system balances and heals.
HOWEVER, no politician wants to take that much of a hit on there watch, especially to there buddies that give them the big bucks for the next campaign.
Lets look at this a friend of mine found today:
Along these lines, both Senator B. Hussein Obama and el Senador Juan McCain voted for the coup. Why? Here are the top ten corporate PAC contributors to both candidates:
Communist Candidate A Communist Candidate B
Goldman Sachs $739,521 Merrill Lynch $379,170
UBS AG $419,550 Citigroup Inc. $287,801
Lehman Brothers $391,774 Morgan Stanley $249,377
Citigroup Inc $492,548 Wachovia Corp. $147,456
Morgan Stanley $341,380 Goldman Sachs $220,045
Latham & Watkins $328,879 Lehman Brothers $115,707
Google Inc $487,355 Bear Stearns $108,000
JPMorgan Chase & Co $475,112 JPMorgan Chase $206,392
Sidley Austin LLP $370,916 Bank of America $133,975
Skadden, Arps et al $360,409 Credit Suisse $175,503
Well isn't that interesting????????????????????????????????????????
((Look up http://www.newswithviews.com/Stang/alan167.htm for full artical. WARNING, artical has some objectionable language and some views that, in my opinion, are hateful, but I can understand the "general" emotion due to the situation we find ourselves))
Hello All:
Can we do something positive to help?
Clearly we see that the crew of this jumbo jet called the economy is fixated on bad instruments and is not looking outside the cockput window at the mountain they are about to run us all into.
Can we:
Maybe I'm a Polyanna but seems to me we are a great nation of smart, resourceful and creative people and if we could get 7 trillion bucks put into alternate energy it would allow us to:
Seems like this site knows the problem and the answer and for whatever reason the few people in the cockpit are clueless. I really doubt they want to auger in, they are on our economy flight and have kids on it.
Just a suggestion. It seems we (myself included) are convinced that hope and optimism have been sucked out of our cabin?
Take care,
Dave
Dave,
You are thinking way too intelligently. Good Job!!!!!!!!!!!!!
Mike