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Putting a spin on Paulson's bailout



September 21, 2008 – Comments (1)

Economists see financial bailout as necessary, financial sites assure us. What are their arguments?

1. We must be grateful to politicians for saving the American economy.

False. The American economy developed problems because a worker whose required salary must cover a $500K mortgage cannot compete with Chinese labor. The bailout aims to perpetuate this state of affairs, so America will continue to deindustrialize itself.

2. Banking is crucial to the economic health of this country.

False. Banking does not produce any goods that people may need. Farming and manufacturing does that. We could put all bank employees on welfare, and still produce as much bread, milk, clothing, cars, etc. as ever, because we'd still have land and factories. If the government can pay 700 billion dollars to keep these people coming to work producing mortgages that will instantly go sour without taxpayers' money, it could just as easily afford welfare payments to them, and as a bonus, the cities would get rid of smog produced by the cars of banking clerks driving to their useless work.

3. The economy will perish without credit which the banks provide.

False. The economy is getting a hangover from the bubble that resulted from having too much credit. We arrived to a point where investing no longer makes sense because too much capital chasing the limited number of investment opportunities drove up asset prices to a level that is not supported by returns on invested capital. Ask yourself the question: if someone lent you a billion dollars at 0% interest, would you build another car factory in Detroit or would you rather buy a stake in Soros's hedge fund? How can withdrawal of cheap credit damage an economy in which investment in production is deemed more dangerous than the riskiest speculation?

4 . Businesses and consumers need loans.

False. If your banker offers you a loan with which you can buy a laundramat round the corner, it doesn't mean you'll have an easier time buying it. It means you will overpay for that laundramat or lose the bidding war. If the banker withdraws the credit line, it doesn't mean that all is lost. It only means that prices of laundramats will drop in proportion, until the highest bidder is able to afford them. In either case, affordability will never be gained or lost, it will simply follow the purchasing power of the highest bidder. As long as loans exist, consumers and businesses must take them because everybody else is taking them, but if loans disappear, consumers and businesses can do without them becuase everybody else is getting by without them.  

5. It was crucial to arrest the downward slide in financial markets.

False. Stock valuations are neutral to the economy. If A sells shares to B at a low price, it's bad for A but good for B. If the shares carry a higher price, it's good for A but bad for B. Over the long term, the economic benefits to stockholders, whoever they are, will be determined exclusively by the company's intrinsic value. The net purchasing power of A and B will remain constant, and the only thing that hinges on the current stock price manipulation is financial well-being of A vs. financial well-being of B, current owners vs. current buyers. It's pure social engineering at its worst. Paulson & Co. just want you to subscribe to their belief that when they're rich and you're poor, it's called "strong economy", and when they are less rich and you're less poor, it's some wrong kind of economy.

6. There will be mass unemployment and depression if we allow the banks to fail.

False. There will be loss of jobs in the bloated financial sector and creation of jobs in the struggling manufacturing sector. It's a classic economic imperative for the capital to achieve the optimal utilization of labor resources. It's called restructuring. 

7. Consumers will lose purchasing power if Wall Street falls.

False. Certain professions will lose purchasing power while others gain. Everybody who produces tangible value will do just fine. If prices of residential and commercial real estate and stocks go down 75%, and you still have your job because you're a farmer growing potatoes in Idaho, then your purchasing power has increased because you can now buy four times as many stocks with your earnings, you can snatch a Manhattan condo on the cheap, and you can employ a top Lehman Brothers executive to look after your pigs if you want to. Everybody engaged in real economy will thrive and prosper while fictitious businesses selling snake oil go bust and restructure.

8. There's be short-term dislocations and it's bad.

False. Dislocations are a normal part of the economic cycle, and they are good for some and bad for others. When we lost all manufacturing jobs to China, surely it was also painful for some people, but we didn't hear any complaints back then because the press starts complaining only when bankers get their fingers caught between the bricks. The shutting down of the financial system will not be any more tragic than the shutting down of car factories. We used to have some 300 car manufacturers in the past, if you rember. Only 3 are still standing, but the world hasn't ended, as far as we know.

9. If property values drop, it will have disastrous effects.

False. The world will not come an end if any factory worker can build himself a house without getting into a lifelong indentured servitude. Only the world as Wall Streeters know it will.

10. Depositors will suffer if banks begin to fail.

False. If banks begin to fail, depositors will gain from deflation more than they will lose  after the failed bank pays them 60 cents on the dollar and FDIC covers up the shortage. But depositors will most definitely suffer now that every dollar they have put in the bank has been diluted by approximately 10% by Paulson, unless you think Paulson is going to pay for the bailout from the tax revenues and there'll be no printing of new dollar bills.

Of course, every intestinal tapeworm wants to convince you that tapeworms is the last thing that still keeps you on earth and that in any case, the side effects of Biltricide are infinitely worse than the alternative of hosting tapeworms in your intestines.

1 Comments – Post Your Own

#1) On September 22, 2008 at 8:03 AM, abitare (30.14) wrote:

Good post.

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