Thursday, October 02, 2008

Rescue to the "Rescue to the Rescue"

Stirred enough about the bailout to fire off a few letters editors and congressman? I was and here's one of them I wrote to Thomas Friedman after reading his op-ed in the New York Times, Rescue to the Rescue.

Dear Mr. Friedman,

My stocks and 401k are down tens of thousands of dollars, my stock options are so far under water I expect they will take up permanent residence in Davy Jones' locker, and, according to many of your fellow journalists at the Times (Trying to Avoid Economic Calamity, Lawmakers Grope for Resolution, In Bailout Vote, a Leadership Breakdown, Revolt of the Nihilists), the House leadership of both parties is stunned, but for me Monday was a good day in America. In fact, I can't remember a day I've had as much fun and as many spontaneous, knee-slapping "Hoorays" reading the news as I had the following morning. But I agree with you that it was an unprecedented moment - at least I'd have to go back quite a ways to find a similar time.

Now we are both reasonable, articulate, well-traveled people - I've read The World is Flat - why are we seeing this from such opposite viewpoints?

You think this is a confidence crisis ("This is a credit crisis. It’s all about confidence. What you can’t see is how bank A will no longer lend to good company B or mortgage company C. Because no one is sure the other guy’s assets and collateral are worth anything, which is why the government needs to come in and put a floor under them. Otherwise, the system will be choked of credit, like a body being choked of oxygen and turning blue." Rescue to the Rescue) and I agree.

What we disagree on is whether this liquidity crisis and loss of confidence is a good or bad thing. You are assuming a loss of confidence is a bad thing. I think this loss of confidence is a good thing because you can't fix a problem until you recognize that you have a problem. This loss of confidence is the first step in recognizing that "Houston, we have a problem."

I have no particular desire to see the "fat cats" of Wall Street turn blue. But I do have a desire to see the Main Street economy put on the right footing. The question thinking people should be asking is "Where did the Federal Reserve get the $85 billion for the last bailout?" and "Where are they planning to get the $700 billion for this bailout?" According to the Federal Reserve Board of Governors they had $905.7 billion in assets as of September 3, 2008. By the end of the month it had increased by $308.2 billion dollars. That's an increase of 34% in less than a month! Where did that capital come from if there is a liquidity crisis and the capital market is frozen? Even if there was no liquidity crisis, that is more than the market capitalization of all but the largest Fortune 500 company. How could it be raised in only 1 month?

Obviously, as you and I know, they don't raise it by capital campaigns, as do other companies. They create it from nothing. Every dollar they create is debt - debt on which US taxpayers will have to pay interest. At least this is what Mr. Eccles of the Federal Reserve told Congressman Wright Patman according to the Congressional Record, 77th Congress, House Committee on Banking and Currency, September 24, 1941, page 1338, 1342. There are many other Federal Reserve publications, e.g. "Two Faces of Debt" or "Modern Money Mechanics," one could cite which say similar things.

This isn't just theory. The $308 billion dollars the Federal Reserve created out of nothing last month will cause real harm to our economy. It provides the capital on which all these derivatives that everyone is talking about are based. The Federal Reserve, with their ability to create dollars out of nothing through the creation of debt, created the excess funds that made the housing bubble possible in the first place.

According to the Bank for International Settlements, the estimated face value of derivatives floating around the world is 1.144 Quadrillion dollars (BIS Newsletter Released June 8 Accessed Oct 2, 2008 - I added the $548 Trillion notational value of listed derivatives to the $596 Trillion OTC as of Dec 2007 ). The combined GDP of the world's economies is just under $70 Trillion. With all that extra money swirling around, no wonder property values were rising so fast.

America is high on Federal Reserve Notes. Allowing the Federal Reserve to inject $700 billion of new debt into our economy to prevent pain from the collapse of the housing bubble is like giving massive doses of cocaine to a crack addict to prevent withdrawal symptoms. Federal Reserve Notes are not the solution to the problem; they are not oxygen to a choking patient. Federal Reserve Notes themselves are the problem. They are like cocaine to a crack addict. To fix the problem we need to remove them from the economy just as one would remove cocaine from the addict.

Yes, it is and will be painful. No doubt about it. I'll suffer from the losses like everyone else. But I'd rather be "addiction free" than high on the Federal Reserve's notes - and so would all the other thinking, liberty-loving Americans who have been pouring their letters and calls into Washington.

The real leaders in the House were the members of both sides of the isle who, despite intense arm twisting from party leadership, voted in the best interests of main street and just said, "NO!"

I think they deserve a standing ovation.

Peter Allison
Houston, TX

Revised Oct 2, 2008

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