News from Wall Street and Capitol Hill--The Mother Of All Bailouts Begins to Grow

Monday, Mar 31, 2008

Last week, the mainstream media described the latest expansion of the Mother of All Bailouts (MOAB), but they politely refrained from calling this what it is: socialism, plain and simple. The grand plan, as it stands now, is to bail out not just consumer banks, but also investment banks, with taxpayer dollars. They are effectively making our life savings and our future earnings surety for a bunch of idiotic contrapreneurs' loans on everything from flat top duplexes to McMansions. These were houses that the contrapreneurs bought, that they could never really afford unless the market continued to rise at an artificial rate. They bought these houses with the intention of "flipping" them, but then the market topped out, and the "easy money" party ended.

At least those hated fascist dictators like Mussolini had the common sense to nationalize viable, productive companies. But now Ben Bernanke is busy nationalizing a slew of corporations with negative net worth. This is absolute lunacy!

Here are four examples of the mainstream's view:

From The Washington Post: Fed Leaders Ponder an Expanded Mission.

From The New York Times: Treasury Dept. Seeks New U.S. Power to Keep Markets Stable

From Reuters: Treasury regulatory overhaul plan "timely": Fed

And finally (with an ever-so-slightly more conservative view), this from Fox News: Bush Administration Proposes Sweeping Overhaul of Financial Regulation.

All of these calls for regulation, new government agencies, and greater scrutiny might outwardly sound well-reasoned, but they ignore some inescapable underlying problems: We have a fiat currency that is based on debt, we have a banking system with fictional fractional reserves, we have a derivatives market that is a $500 trillion casino, and we have a national treasury that is backed by wishful thinking--certainly not by anything tangible.

The other key point that seems to have escaped the mainstream media is that this new regulatory power is being handed to the Federal Reserve, which is a private banking cartel, not a government agency. They are no more "Federal" than the Federal Express parcel courier company. So this isn't just socialism. This is nothing short of corporate-controlled socialism--where a handful of banking corporations are given access to the Federal tax coffers to bail out other institutions and then, even further, they are given sweeping regulatory powers. This power grab is deemed "necessary" by circumstances that the Federal Reserve itself created! Somewhere, somehow, somebody stands to make a lot of money in this process. Cui bono? I'll wager that it won't be the American taxpayers that benefit. As economist Mish Shedlock observes, this is like putting the Fox in Charge of the Henhouse. Mish summed up the current mess succinctly: "The biggest, most reckless credit experiment in history has started to implode. It's far too late to stop a complete systemic collapse now. Granting new powers to the agency most responsible for the mess simply does not make any sense."

Secrecy is another concern. In a recent e-mail, SurvivalBlog reader KAF commented: "We should be greatly concerned about the fact that the Federal Reserve has provided public release anonymity to the institutions who are taking '30 day' never ending loans. We'll now never know if the institutions we deal with are truly solvent and credible, This new"confidentiality" allows the Fed. to manipulate reserves on a routine basis. We'll never know if this country's Federal Reserve is or is not heading for bankruptcy unless we use the tests of consumer spending and commodity pricing as indicators." She hit the nail on the head. At the same time that the press is howling for "greater transparency" in banking, and writing exposes of "predatory lending practices", the Powers That Be are drawing the veil of secrecy over lending institutions. They'd rather treat us like mushrooms--keeping us in the dark and feeding us barn waste--than risk a panic by letting the public know the real depth of the liquidity crisis and its collateral effects.

Instead of government platitudes, do you want some figures to chew on? Look at this Federal Reserve web page. The negative numbers at the bottom of the "Non-loaned Reserves" column speak volumes. Without the newly-created Federal Reserve "emergency lending mechanisms", many banks would be absolutely bankrupt. As you can see, the bankers are swimming in red ink. There is now a huge risk of bank runs, but this threat is being ignored by the mainstream media. Mark my words: There are bank runs coming.

The fact is that the global lending system is essentially broken. Artificially lowering interest rates won't fix it, when bankers are afraid to lend. As I've previously noted, the bankers are afraid to lend because so much re-packaging and reshuffling of debt has gone on in the past seven years that nobody knows who owes what to whom, and precisely what assets are underlying these exotic debt "packages." Meanwhile, the bankers have learned that the big insurance firms like Fitch, Moody's and S&P were in on the swindle. We now know that they colluded with their mortgage firm buddies to inflate assets and deflate risks in a masterpiece of legerdemain that would make Enron's accountants proud.

The bottom line is the the entire world economy is is in deep, deep trouble. Without financing, the Big Machine is grinding to a halt. The next few years will probably see the economy plunge into a deep recession, if not a full blown depression. The current headlines are just a foreshadowing of the real crisis to come. The MOAB will grow and grow, eventually bailing out far more than just banks. There will be brokerage houses, insurance firms, S&Ls, credit unions, Fannie Mae, and Freddie Mac, and possibly even muni bonds and pension funds are all lined up, ready to reach into our wallets. Once the government starts down the slippery slope of bailout-socialism schemes, they will perforce spread to more and more institutions. And, as I've previously noted, the public coffers will be insufficient to cover the inestimable costs of the MOAB. So this mean that Uncle Sam will monetize the difference. They'll just create the needed "dollars" out of thin air. This will be outrageously inflationary, at all levels.

All of this is not going unnoticed by European and Asian bankers. They can see that the dollar is set for mass inflation, so they are dumping dollars as fast as they can. It is no wonder that the US Dollar Index has plummeted. When I last checked, it took $1.58 to buy one Euro! The foreign bankers aren't stupid. Upcoming auctions of US Treasury paper will languish with very few takers. I predict that in less than a year, the Treasury yields will have to be pumped up substantially to attract enough bidders to get the needed financing to cover the budget deficit. We could see double digit rates--a la the late 1970s--in the not too distant future.

All of these macro-level implications might seem fairly abstract, so let me put them in real world terms and take the risk of extrapolating on some trends that I've observed: There will be a recession, and it will be deep, and long-lasting. A recession will mean that there will be some big corporate layoffs. Be ready. There will be bank runs and banking "holidays". Be ready. There will be huge flows of "bailout" funds that will effectively nationalize many industries. Be ready. There will probably be a stock market collapse. Be ready. There will be a further collapse in residential real estate that will make the recent declines seem small, by comparison. Be ready. Credit delinquencies and foreclosures (on car loans, home loans, credit card bills, etc.) will dramatically increase. Be ready. There will be a collapse of the commercial real estate market. Be ready. Even though the credit available for IPOs and private mergers and acquisitions has dried up, there will be news of some large and seemingly inexplicable acquisitions in the near future, all sanctioned by and in some cases, underwritten by, and even funded by, the Federal government. Be ready. There will be shortages of key commodities including fuel and food. Be ready. Strapped for cash, America's highway, rail, water, sewer, telecommunications, and power infrastructures will degenerate. Be ready. There will be mass inflation of the US Dollar that will devalue any dollar denominated investments. Be ready.

And now, to further extrapolate, (with a lower level of confidence): All of the aforementioned economic dislocation and surging inflation might trigger mass protests, riots, looting, and arson in the cities. Be ready. There may then be massive out-migration from the cities. Be ready. Wars have been known to follow close on the heels of depressions and financial crises, so there may be a war, possibly big enough to require another draft. Be ready.

As I've written many times before, the real lynchpin to worry about is the power grid. If the grid goes down, then all bets are off. Be vigilant, be well-stocked with a deep larder, and be self-sufficient. Store extra for charity. If you can afford to, establish a survival retreat in a lightly-populated region, and if possible, live there year-round.


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