The Bailout Still Sucks: A Look at its Cause and Effects

Early this year, US Treasury Secretary (and ex-Goldman Sachs alum) Timothy Geithner and his department announced TARP has been working, we have been saved, and they’re all going to be making money soon.

So, yay for the Bush bailouts, right?

Wrong.  Very wrong.

According to the Congressional Budget Office:

The Congressional Budget Office has estimated the ultimate cost of the bank bailout, or the Troubled Asset Relief Program, will be as low as $25 billion.

There is already some issues right off the bat with that statement.

  • Without questioning their figures and numbers, it’s still a $25 billion loss to the taxpayers.
  • But their figures and numbers should be questioned – namely, how they get their “future” numbers.  A basic question should be asked: “How does the CBO estimate the future?” Can it even be estimated, when we already have a hard time understanding the present or even the past?  The Federal Reserve (both former Chairman Greenspan and current Chairman Ben Bernanke) and the government claimed they did not see the financial meltdown coming.  Federal Reserve Chairman Ben Bernanke explains the reason why he didn’t see it was because lack of regulatory oversight.    I find that hard to believe.  In the wake of Sarbanes-Oxley legislation after the fallout of Enron and WorldComm, regulatory spending and oversight in accounting and the finance market increased sevenfold.  Notes Jeff Jacoby from the Boston Globe:

Like the alligators lurking in New York City sewers, Bush’s massive regulatory rollback is mostly urban legend. Far from throwing out the rulebook, the administration has expanded it: Since Bush became president, the Federal Register — the government’s annual compendium of proposed and finalized regulations — has run tomore than 74,000 pages every year but one. During the Clinton years, by contrast, the Federal Register reached that length just once.
Similarly, the administration has broken every previous record for regulatory agency spending. According to researchers at Washington University and George Mason University, appropriations for federal regulatory functions have soared during the Bush years. Adjusting for inflation, the regulatory budget has grown from $25 billion in fiscal year 2000 to an estimated $43 billion in FY 2009 — a 70 percent increase. “In constant dollars,” writes James Freeman in the Wall Street Journal, “the Bush regulatory budget increases vastly exceed those of predecessors Clinton, Bush, Reagan, Carter, Nixon, and, yes, Lyndon Johnson.” Staffing has skyrocketed, too. Regulatory agencies employed 175,000 people in 2000. They employ nearly 264,000 today. (Some of that reflects the Transportation Security Administration’s takeover of airport security screening in 2003.)

Amid the stress and storm of the financial crisis, “deregulation” makes a convenient villain. But the facts tell a different story: The nation’s regulatory burden has grown heavier, not lighter, since Bush entered the White House. Too little government wasn’t what made the economy sick. Too much government isn’t going to make it better.

It is hard to make a case that any more regulation than what was already written and enforced would have prevented another crash.  The key source for the crash was the creation of easy money; and there is only one entity that controls the supply of money and credit in the US – The Federal Reserve.  If we didn’t have enough oversight of the financial markets then, do we have enough oversight now to accurately predict it?  If so, how? Onto the next point:

  • If one is forced to pay $600 in a company to stabilize it after making poor business decisions, and the company turns around to make a profit while the investor has a net loss of $25, isn’t something wrong with that picture?
  • The most important of point of it all – we are currently still losing over $400 billion from the bailout so far.  Of the $619Billion committed, only $267.7Billion has been returned.  We have a long way to go still to come anywhere close to breaking even for the taxpayers.

Notice, too, how the Treasury Department is not reporting anything about Fannie Mae and Freddie Mac – two government-sponsored entities (GSEs) that participated in the subprime mortgage crisis the most, which then was almost completely nationalized during the meltdown. Fannie Mae was lended $87 billion, to which they paid back only 10 billion of it, and Freddie Mac was lended $63 billion, to which they only paid back 10 billion of that too.  Fannie Mae and Freddie Mac were bailouts, but not considered part of TARP despite them holding toxic assets just like everything else in the market at that time.  However because they were nationalized, they mysteriously (or perhaps not mysteriously) were written off the books.

Fancy that.

The second huge issue regarding the bailouts is how it assisted in exploding the money supply.  Because government and the Federal Reserve works on a different plane of reality than a working economy does, the Fed has created credit from nothing in order to fund the bailouts, Obama’s stimulus, as well as the ongoing massive overspending the federal government typically practices.  This is what is called “quantitative easing.”  It’s another way to say “print money/credit out of thin air.”  Today’s article in Forbes shows some pretty damning graphs on what is happening with the money supply:

Below we look at the impacts of the Fed’s policies of ultra low interest rates and increasing money supply.

Fed Lowers Rates to Get the Economy Moving

With the fed funds rate near zero, it can’t go much lower. Given this, the treasury has added to the monetary base via QE1 & QE2. The chart below show how dramatic this move has been. The monetary base has increased by $1.8 trillion in the last 2 years with the treasury printing lots of greenbacks.

As you would expect, when you increase the monetary base by printing money the value declines. Basic supply and demand. Below is the trade weighted exchange for the dollar.

Dollar Weakens As Money Is Printed

To make matters more troublesome, our Federal Debt has reached unprecedented levels and is at the debt ceiling which will have to be raised.

Guess what all of this does?  Well, if you have gone to the pump lately, or have gone to the grocery store lately, you’ll find your answer.  In December, prices for groceries rose sharply  by up to 5.8% for some items, averaging close to 4% for others.  Then in February it rose again another 3.9%.  And gas prices, just like the great stagflation of the 1970’s, are on its way up without end in sight.

And of course there is the price of gold and silver.  In 2008-2009, Silver was typically $17/oz, fluctuating by a few bucks up and back down.  As of today’s close, we are seeing it at $39.50/oz.  Over a 100% increase.  Gold was at $800/oz give-or-take back in 2008-2009.  It’s now teasing to hit $1600/oz.  Almost a 100% increase.

This type of inflation is not occurring because of supply/demand in the market.  This is more of a reflection of the dollar’s devaluation that is affecting supply and demand.  And that effect hits one demographic the hardest – you and me, the working class.  Inflation is called “the hidden tax,” because it doesn’t actually take away any of your money, but it steals the value of the money you have.

Meanwhile guess what banks have been sitting on billions to trillions of dollars in cash during this supposed recovery?  Citigroup, JP Morgan/Chase, Bank of America, Well Fargo to name a few.  Big banks that got the bailouts.  Some are saying the banks are holding onto their cash to both keep up with new federal regulations for liquidity, as well as stinginess to lend in an economy that is still stagnant, plus to minimize their own risk for future losses.  All of that may be true, I won’t necessarily argue that, however another question ought to be asked – If the banks have all this cash only years after 2008, why were they bailed out in the first place?   Of course the answer I usually hear is “If they didn’t, our economy would have tanked and there would be no more credit left. ”

But that was nonsense.  This article in the New York Times shows how:

PennyMac, whose full legal name is the Private National Mortgage Acceptance Company, also received backing from BlackRock and Highfields Capital, a hedge fund based in Boston. It makes its money by buying loans from struggling or failed financial institutions at such a huge discount that it stands to profit enormously even if it offers to slash interest rates or make other loan modifications to entice borrowers into resuming payments.

Its biggest deal has been with the Federal Deposit Insurance Corporation, which it paid $43.2 million for $560 million worth of mostly delinquent residential loans left over after the failure last year of the First National Bank of Nevada. Many of these loans resemble the kind that Countrywide once offered, with interest rates that can suddenly balloon. PennyMac’s payment was the equivalent of 38 cents on the dollar, according to the full terms of the agreement.

Under the initial terms of the F.D.I.C. deal, PennyMac is entitled to keep 20 cents on every dollar it can collect, with the government receiving the rest. Eventually that will rise to 40 cents.

Phone operators for PennyMac — working in shifts — spend 15 hours a day trying to reach borrowers whose loans the company now controls. In dozens of cases, after it has control of loans, it moves to initiate foreclosure proceedings, or to urge the owners to sell the house if they do not respond to calls, are not willing to start paying or cannot afford the house. In many other cases, operators offer drastic cuts in the interest rate or other deals, which PennyMac can afford, given that it paid so little for the loans.

Even with a money-losing system like the FDIC (which, by the way, was running out of funds last year and demanded early premium payments from banks to help balance their own books), there are firms out there willing to buy bad loans for pennies on the dollar and both make a profit for themselves AND the people they bought the loans from.  It makes it a tougher case to be certain behind the concept of rewarding the big banks with taxpayers money despite evidence showing there was still enough cash in the market for the larger lenders to either stay afloat, sell off bad securities, and turn around borrowers into profitable clients again.

And why are we not investigating fraud with these big banks who gambled/misused their depositors’ money?  I have a feeling the truth is all too depressing.  I think the answer is it would seem disingenuous to prosecute and investigate the banks that played fraudulently with their depositors when the Grand PooBah of banks, the Federal Reserve, is doing the exact same thing the banks did – the difference is, the Federal Reserve can print money/credit whenever they want.  But you can’t inflate your way out of a recession and into prosperity.  It’s trading one recession for a new one, and if the government does not get us by taxes, it will get us by inflation.   Well, unless you are a CEO of a big bank, or even better, a Chairman of a Federal Reserve bank.

About briandefferding

Brian works at a small pipe and tubing company by day, and freelance illustrates at night. He is the creator and self-publisher of the critically acclaimed independent horror comic book series "School: A Ghost Story." Brian currently resides in his birth town of Appleton, WI, enjoys whiskey and John Lee Hooker.
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