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Wag the Dog Wag the Dog
by Jack Wellman
2008-09-23 08:55:59
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The Bull has been running...only it’s been in the wrong direction. The federal government has been buying up “hundreds of billions of dollars of illiquid mortgage assets at a deep discount from banks”1. The financial markets have never seen such sweeping interventions in the financial markets since the Great Depression.
 
There will be six central banks in all to prop up the U.S. financial crisis: including the Bank of Japan, the U.S. Federal Reserve, the Bank of Canada, the Bank of England the Swiss National Bank and the European Central Bank. The joint supply of the U.S. dollar to short-term funding markets is an effort to stem the current turmoil in the global financial markets, of which Wall Street is a major player.
 
One action may include a currency swap deal worth $60 billion with the Federal Reserve Bank of New York to provide dollar funds to financial institutions participating in Japan's short-term money markets. The Treasury Department is likely to run the program directly. They argue that the government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy.
 
Financial institutions in Europe and the United States have been facing difficulties in raising funds amid the market turmoil in the aftermath of the bankruptcy of major U.S. brokerage Lehman Brothers Holdings Inc. and a host of other billion dollar companies. The reasons are that central banks across the world have set a kind of defense measure for the U.S. dollar, which is an international currency.

Monopoly

A proposed $700 billion will be used to purchase troubled mortgage assets and contain the financial crisis. It’s as if they’re playing Boardwalk and mortgaging all the property they have and much of what they other plays have too, to continue to buy some houses for their monopolies. The most disconcerting factor is what taxpayers will ultimately pay for this bailout.
 
The present administration is currently asking Congress to authorize an increase, effectively raising the nation's debt ceiling. The next legal, fiscal-period debt ceiling already has an increase in it. It will go up to $10.6 trillion for the fiscal year 2009 - which runs from October 2008 through September 2009. The new proposal seeks an increase of up to $11.315 trillion. This amount is earmarked for the purchases of mortgage-backed assets.
 
With the government buying assets at or below-market rates, in the hopes of holding them until the market recovers, is taking a huge risk. Your throwing the proverbial dice…you have no guarantee of passing “Go” and collecting your 200 hundred dollars. No one knows if this trend will continue…and if it does, will the government continue to buy up more insolvent/bankrupt businesses, and on overseas moneys? What if the economy worsens? Will the government continue buying up mortgaged-assets? This seems an ominous sign that the fed‘s are now in business for themselves (with taxpayer as compulsory stockholders).
 
Jaret Seiberg, a financial services analyst at the Stanford Group, a policy research firm said "The government could make a profit, a substantial profit"3, but “could” is not “should”, and if this will work out…the jury is still out on that. Why bail out these mortgage companies whose only goal was to squeeze out as much as possible from the consumer? What little equity they had, was then used to entice or encourage the homeowner to move up in their standard of living, via a larger, more expensive home. There was “wiggle room”.
 
But on paper, it was a house built with matchsticks. Mortgages so much at risk, and so flammable in proximity, that at the slightest friction in the economy, a raging inferno was a very real possibility. These houses of cards were so skilfully laid by lenders, lenders who had little concern over any collapse, that they themselves were not even worried. They held the mortgages so at least they had that. The homeowner, having no security, is left with nothing - perhaps only a shattered dream.
 
Many of the homeowners most certainly over-extended themselves and may have caused their own mortgage foreclosure, so no they could not all be blameless. But house lenders/realtors are in the business of selling houses. And the enticement (no less effective with a realtor) to buy close to or almost beyond one’s means is made all too easy. Then, with the suddenness of the closing bells at Wall Street, the danger of a suburban row of dominoes…coming systematically down with a crash and coming apparently without warning. Then, when one house failed and went into foreclosure, then others, by effect, would follow. Vacant houses drive down the market value. It feeds on itself, exponentially, in closer proximities.
 
Another concern is that the bailout will not make banks immediately profitable, and it will not stop the slide in home values…that is what is really demolishing the economy. What is fearful is that if the plan doesn't stem the tide of foreclosures, home prices are not going to stabilize and consequently, the economy will not recover and the government will continue to acquire even more houses it can’t sell. Uncle Sam’s “used homes” collection grows larger and larger and with oversupply of cheap houses, prices could continue to fall. It is not so much a conflict of interest as interest’s in conflict.
 
With the property prices continuing to plummet and borrowers defaulting on their loans, these investments are seen by the Treasury Secretary as being at the heart of the global financial crisis. BBC’s Business Editor, Robert Peston said “There will be serious long-term damage to the ability of the US to export its way of doing business to the rest of the world”. 2
 
This taxpayer funded bail-out "represents a massive humiliation for Wall Street" continued Peston, and that “…it will severely dent the ability of the US to export its way of doing business to the rest of the world and in fact could lead to a loss of confidence in the American government's balance sheet.”2 It is reasonable to assume that this would undermine the dollar, which would then push up inflation even more and raise the cost of servicing debt even further for the US government. It is the tail wagging the dog. It is oxymoronic. Is this the game of Monopoly, where the government is also the banker?  They are playing with our money aren't they?

I wished that I could find some positive news out of this.  The only prospect for relief is in the form of legislation that would force lenders to renegotiate mortgages that homeowners are having difficulty paying. Otherwise, a new government agency may have to be created that would take on the debt. This is a concern with the latter, since many remember the new agency that was created after 911: Homeland Security. However for most people, they quickly envision the bottomless money pit that it was. This crisis does not need another agency. Especially considering the cost of such a bailout would probably be higher this time, with bad mortgage debt believed to be around $2 trillion.
 
I hate to see the government be in the business of being in business. Then, the question becomes, who’s minding the bank? The bankers!? I feel a greater concern is not the separation of church and state, but the state and business. If our forefathers could see this, they would say…”this isn’t what the governed-meant!”

1. By Tami Luhby, CNNMoney.com senior writer
September 20, 2008
2. BBC, Friday, 19 September 2008 news.bbc.com
3. breitbart.com Sep 18, 2008 Associate Press


   
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Emanuel Paparella2008-09-23 13:28:47
Indeed Jack, Wall Street as casino for the rich has fully come on its own since deregulators with a vengeance like Bush and McCain took away most accountability to the common good of Main Street. As the movie “Wall Street” illustrates, they thought greed was good for America, that virtue and vice were passé concepts, and that the profits of bad money would trickle down to main street which they pompously dubbed “the ownership society.”

I have assigned an essay for my philosophy students titled "Socialism for the rich and capitalism for the poor" withing the context of social philosophy. I have told to read the daily papers besides Mill and Marx. They have come back with some interesting statistics which I'll share with the readers in my next article. Perhaps a fruitful dialogue can ensue which may shed some more light.

It is not only the founding fathers who must be turning in their grave but Mill and Marx too. Not in their wildest dreams did they think that the terms socialism and capitalism would be turned up-side-down. In effect what we have now is socialism for the rich to ensure their financial gambles and assets and capitalism for the poor who are on their own when they cannot pay the fraudulent mortgages into which they were tricked. The poor take the risks and the rich take the obscene profits. Marx redivivus?


Sand2008-09-23 15:03:22
For someone who prides himself on a knowledge of history the fact that the criminal manipulation of the economic system in favor of the rich is a surprise is quite indicative of something or other.
You make the choice.
I lived through the debacle of 1929 and the subsequent results of unshackled crooked manipulation of finance and it was plain for a long time it was coming.


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