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Peter Schiff: Bailout-a-Go-Go



December 01, 2008 – Comments (8)

Keeping track of the ever mutating bailout debate is becoming increasingly difficult. With the Federal money spigots now thrown wide open, and with no one of influence advising restraint, the only debate is where to direct the torrent. During the past week, the talk began with Detroit and Citigroup, but by Friday had shifted to a massive “stimulus package” to bail out consumers. The early buzz includes some very large figures. But first, a bit of a recap:

On Monday, the $300 billion Citigroup bailout took center stage. Once again Henry Paulson decided to throw taxpayer funds into a bottomless Wall Street money pit. Shockingly the Citigroup plan did not seem to demand any serious curtailment of lavish salaries and bonuses. Paulson’s shameless largesse to his Wall Street friends has elevated financial industry bonuses to entitlement status.

“Remember Lehman” now seems to be the rallying cry to justify any and all financial bailouts. But Lehman’s demise is in no way responsible for our current problems, and the decision to let them fail is the only bright spot in otherwise consistent record of policy mistakes. We bailed out Bear Sterns and AIG, and what did that get us?

The Citi bailout greatly increases the chances for a similarly misguided auto industry bailout. After all, if taxpayers ensure multi-million dollar bonuses for Citi executives, how can they refuse similar help for eight-figure auto executives and $70 per hour unionized auto workers?

It was inevitable that the size of these bailouts would up the ante for an economic stimulus package aimed at consumers. Not missing a beat, Barack Obama announced a $700 billion dollar fast-tracked package that will likely exceed $1 trillion before passage. (Trillions are the new billions.) The plan must be sending shivers down the spines of our foreign creditors who are expected to foot the bill. Add this cost to the hundreds of billions of prior stimulus and bailout packages, and the cost to our creditors is quickly heading into the multi-trillion dollar range. It can’t be long before they cry uncle and repeat the words of prizefighter Roberto Doran “No Mas.”

With so many familiar faces on his new economic team, Obama signaled his intention to “hit the ground running.” With the possible exception of Paul Volcker, all of his top appointees share the view of the Bush administration that the root causes of our economic problems lie in the reluctance of banks and other financial institutions to lend. As a result, we can expect a virtual continuance of current policy.

It is no surprise therefore that both Democrats and Republicans offered healthy “huzzahs” to Henry Paulson’s latest bazooka: $200 billion to purchase securities backed by auto, student, and credit card loans. It is hoped that with this transference of risk to taxpayers, lending institutions won’t be so cautious, and the credit-fueled American economy can thrive anew. This is unalloyed insanity that can only lead to total ruin.

Paulson stated clearly that he would print as much money as it takes to revive the economy. Unfortunately the only industry likely to be revived by such policies is printing itself. But even this will not help the United States as the majority of our printing equipment is imported from Switzerland.

But what if the root of our financial problem is that American consumers have already taken on too much debt? By trying to force feed even more credit down the throats of already overly indebted Americans, Paulson’s plan will only weaken the economy further.

Building on the groundwork laid by Paulson, the massive stimuli that will likely be pushed through by Obama and an overly eager Democratic Congress will further impede any real recovery. By swallowing up all available capital, spending to create government jobs will destroy far more private sector jobs. Rather than expanding government and increasing the national debt, policy makers should be thinking about doing the opposite.

The brutal truth that no one in Washington dares acknowledge is that our systemic economic problems can only be solved by a reduction in consumer borrowing and an increase in savings. We must repair our national balance sheet and a painful recession is the only path to achieve this. By interfering with the market’s attempts to bring this necessary change about, all the proposals currently coming from Washington or bubbling up from think tanks and Nobel prize-winning economists, will only exacerbate the imbalances and lay the foundation for even greater losses and a larger crisis.

A short-run reduction in GDP is a sacrifice we must be willing to accept. If we swallow this medicine now, in the long run we will have a sustainable rise in GDP as higher savings leads to increased capital investment, greater productivity, and eventually a lasting increase in consumption.

8 Comments – Post Your Own

#1) On December 01, 2008 at 5:48 PM, johnw106 (< 20) wrote:

All well and good but a un regulated and unwatched free market is what got us into this mess.
When government and private sector people both were telling congrees to stop the madness back in 2005, the very same banks and others who are now being baied out fought any and all interference by the government.
Their cry was "let the market take care of it". "Regulation will harm home owners and cause a recession". Well we see where that led. A free market allowed to be run by greedy and unethical characters leads to destruction.
And the last eight years of spending increases with no increases in tax has not helped.

Its easy for some to say "let them all go bankrupt" when one is not out on the street with no food and no hope. I see a lot of right wingers complaining and pointing a finger, but offering no real solutions to the mess other than the same tired drivel that got us here. "Let the market sort it out" my ass.

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#2) On December 01, 2008 at 6:11 PM, ThoughtfulFool (< 20) wrote:

With the poor fiscal managements of these companies, I am against the bailouts as it is just throwing good money into a black hole.  And as a libertarian, I am against big and growing government.  So I am in general agreement with the original poster with one exception: infrastructure spending.  When Obama announced that he would begin a 2 year program of infrastructure spending to give people jobs, I applauded.  I believe we are headed to a depression, and unemployment is one of the main problems.  During the Great Depression, things did not really start turning around until FDR began programs of this nature to put people back to work.  I would hope these would be just "temporary" programs until things turn around.  However, knowing how the government works (both democrats and republicans), I fear they will become permanent, never going away, and therefore make our government even bigger and the deficit and debt even more enormous.

BTW, kdakota, I really enjoy your posts.  Your blog is one of my favorites here, even if I don't always 100% agree with you all the time.

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#3) On December 01, 2008 at 6:27 PM, kdakota630 (29.40) wrote:

Thanks for the compliment on my blogs, even if I'm usually just reposting other people's stuff, ThoughtfulFool.

I'm mostly a libertarian as well, and I do agree with Obama's infrastructure investment.  The only worry that I have about it is that it's more deficit spending at a time of record deficits and a slowing economy.  I believe that it would've been a better injection of cash into the economy had Bush invested in infrustructure than that stupid stimulus cheque idea.

And while admittedly not a scholar of The Great Depression, my understanding is that it wasn't FDR's programs that turned the economy around, but WWII that did it.  I'm sure people smarter than I can argue both sides of that.

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#4) On December 01, 2008 at 6:51 PM, kdakota630 (29.40) wrote:

Peter Schiff Analogies

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#5) On December 01, 2008 at 6:52 PM, Darwinfish67 (< 20) wrote:

Strongly agree about lack of regulation Johnw, although I am sure Mr. Schiff would argue that government economic policies over the last few years are at the core of the problems and have prevented the free market from regulating itself.

 And he would be wrong...

To which I would point north to Canada and note that while their general economic policies have largely mimicked the US, they have nothing like the subprime problems here - essentially because they enforced common sense lending regulations. These are now the worlds highest ranked banks,and while they might like to credit themselves it was the Canadian government that declined their pleas for mergers and reduced lending standards that likely deserves the most praise.

The real problem here though is everything is so politically polar, to suggest maybe something as critical as banking standards might be a consideration only gets one dismissed as a heathen "Socialist".

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#6) On December 01, 2008 at 11:27 PM, abitare (29.86) wrote:

1. Peter Schiff is right.

2. FDR and Hoover took a recession and made it the GREAT DEPRESSION by overspending.

3. The FED created the bubble today and it created the bubble in the 1920s.  

4. Capitialism and the free market did not create this problem. The corrupt and inept Congress, the private cartel the FED, the corrupt criminal Fannie and Freddie, fiat currency, fractionial reserve lending created the problem.

5. FDR in 1933 confiscated personnel gold holding in 1933 and created the Great Depression. Americans had their savings destroyed by the government and could not reinvest in new investments. FDR was almost overthrown.

6.  Obama has no money. The US government is the worlds largest debtor in the history of the world. Obama can print money and build bridges to no where. But interest rates will rise, the dollar will weakon and peoples' savings will be destroyed.

7. If there is infustructure needed or bridges need, the private sector can build them. Obama has no idea what is needed and the government is not an effiecent employer of capitial.

8. Lossing the reserve currecy status and collapsing the fiat currecny should be Obama's biggest concern.

9. Inflation is a regresssive tax. Inflating a currency to build infustrure and support other government programs is not going to cure our current progams.


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#7) On December 01, 2008 at 11:28 PM, abitare (29.86) wrote:

Wikipedia: Austian Economist view of the Great Depression

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#8) On December 03, 2008 at 9:43 AM, Entrepreneur58 (37.56) wrote:

The governement is trying to get us out of a hole by digging harder.  We loaned too much money to folks who couldn't pay it back.  Now the government is loaning even more money to folks who can't possibly pay it back to "solve" the problem.  This is insanity.

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