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Thread: The Treasury Bailout Plan (A follow-up from last Friday)

  1. #1

    The Treasury Bailout Plan (A follow-up from last Friday)

    A friend of mine writes a select few of us these fabulous emails about what's going on with the markets etc. I got his permission to share it so without further adue here is his message.

    Side note: One thing he mentions in here I think makes way for the Amero.

    Folks,

    All of this is moving very fast. Our government does not quite agree on what needs to be done. But unfortunately I do not think the correct action, the action that must be taken to yield the best possible outcome for the United States and its citizens, is on the table for consideration. My first priority this evening was to arrive at a letter, concerning the bailout proposal offered by the Treasury, that I could send to our senators and representatives. If you are interested in reading it or using it (modify if you like as well), send me an email and I will forward you a copy. I will also be working on a shortened version. I can also provide you information on how to contact your senators and representatives. I know that some of you have already exercised the right to voice your opinion and assembled your own letter. This is to be commended. This is a vitally important matter that will have a significant impact on this country for years, if not decades.

    Also, many of you have asked permission to forward my writings onto others. Please do so as you see fit.

    I will discuss (in bullet form) a few of the key points of the proposal by the US Treasury (led by Treasury Secretary Paulson) and why I hate this proposal. By no means is this exhaustive (just ask my fantastic wife as she is subjected to my verbose rantings - and understands them as well), but I wanted to keep this a reasonable read. Here is a New York Times link to the stunningly brief text of the Treasury plan. http://www.nytimes.com/2008/09/21/bu...ss&oref=slogin

    * It looks to me that the $700 billion being touted in the bailout plan seems to be the $500 billion suggested on Friday plus the $200 billion announced in the Treasury's new "Supplemental Financing Program" ... http://newyorkfed.org/markets/statement_091708.html). Where do they get the $700 billion? They will auction off more treasury debt, which will suck in US Dollars that have been taken out of circulation as they are residing as reserves in foreign Central Bank vaults and other foreign investor accounts. Thus, this is just as inflationary as money printing because these "dungeon dollars" do not compete for goods and services at present (they are held as reserves). But once they are unleashed ... watch out. Any shortfall in treasury financing will be met simply with quantitative easing by the Federal Reserve (money printing). Also note that the $700 billion is simply a balance sheet item and not an expenditure limit. They can go back for more. Finally, this $700 billion is in addition to all of the other lending programs and bailouts already in service. The total number is approaching $2 trillion. And while we may get some of this back, I do not believe that $700 billion is going to be the total spent under the bailout plan. This number could easily be $1 trillion, if not more. I think we are probably talking about $1.5 -> $2 trillion total when all is said and done. Meanwhile, we will be creating an even bigger problem down the road. As opposed to the less expensive option of taking our medicine now and allowing the free market to purge the mis-allocation of capital and excesses (of course, Wall Street hates this idea as do the politicians that want homeowner bailouts). Of course, politicians always view this option as political suicide. But we need to let them know it is political suicide if they do not elect this option.
    * The most reprehensible part of this entire proposal is the part of the plan that specifies that actions by the Treasury under its authority are unreviewable by the judicial branch (in fact, any court or government agency). This is dictatorial power. Here is the text from the proposal ... "Sec. 8. Review. Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." The proposal also states that the Treasury has the authority to purchase a range of assets, including mortgage loans, mortgage backed securities, and commercial mortgage related assets. But it also states that "other assets", in consultation with the Fed Chairman, can be purchased as deemed necessary to effectively stabilize financial markets. These two points (lack of any oversight and accountability plus the ability to monetize anything it sees fit) represent absolute power by the Treasury and Federal Reserve and is not representative of a free country with supposed free markets.
    * I do want to emphasize the financial instruments that are eligible for purchase. Everything. From any institution considered to be a financial institution. While all the talk is about toxic mortgage loans, mortgage backed securities, and commercial real estate mortgages, Treasury expects that they will be purchasing student loans and auto loans, as well as CDO (Collateralized Debt Obligations) and other derivatives. I have also heard talk about bailout of the credit card companies. This significantly expands the funds necessary to execute such a proposed bailout.
    * Originally, the pricing mechanism was described by Paulson as being a "market price" bid by the government. But this simply would not work because financial institutions do not want to sell at "market prices". They would go bankrupt. Thus, the bid must be above "market price". Now I am hearing that a reverse auction will be conducted. This is where the lowest price wins. The financial institutions are wary of this option as evidenced by the sell-off in the market today. However, the price they receive really depends on the supply of funds vs. the amount of assets that will be competing for these funds. Given enough money, some very high bids could be accepted (obviously bad for the taxpayer). If the supply of funds is dwarfed by the amount of assets for sale, then the banks could be writing off a lot of losses and the program will not meet the intent of the authors. But one question I have is how this really will be executed. You will need a reasonable complex classification system for the assets being put up for sale.
    * Who will manage the bailout? Treasury proposes that consultants be brought in from the outside to manage this complex bailout. The same financial professionals that leveraged our financial institutions to "kingdom come" and now want to play doctor? No thanks. Do you think there could possibly be some conflict of interest here?
    * This plan is really nothing like the Resolution Trust Corporation (RTC). Historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts (such as the RTC). Only after that did the government try to repackage and sell their assets. The federal government took over the S&Ls first, protecting their depositors, then transferred their bad assets to the RTC garbage can. As I mentioned in a previous missive, Sweden took over their troubled banks (nationalized them) in the 90's during their banking crisis, again protecting their depositors, before transferring their assets to their equivalent institutions and recapitalizing the system. Shareholders and bond holders were wiped out. This is not what is happening here. The Treasury and Fed are simply trying to pluck off the bad assets from the financial institutional balance sheets and once that is done, carry on with business as usual. Such that all of this can happen again, but on a grander scale (do not be fooled that regulation alone will solve this, not that any of this is in the proposal). Meanwhile, shareholders and bondholders are made whole and the taxpayer suffers.
    * The litmus test for this entire crisis will be investors' (much of them foreign) willingness to participate in lending to the US for this bailout, as well as the continued required financing of the massive debt accumulated over the years (soon to be well over $11 trillion). Without this support, the bond market will head south and the dollar will be in serious trouble. The lack of sufficient support for our debt markets (which will be triggered by lack of confidence in the Dollar) will send interest rates higher until the bond bids are met. Where we land determines the fate of the bond market, our financial system, and our economy. This could then lead to a challenge of the US Dollar as the world's reserve currency as the world's investors and central banks may unload portions of their existing holdings. If the US Dollar loses world reserve currency status and enough foreigners dump their Dollar holdings, it is game over for the US Dollar and we will be forced to restart our financial system and form a new currency.
    * One final point I would like to make as I have heard some financial analysts refer to this as similar to the problems the Japanese faced in their deflationary crisis of the 90's. How the bailout will be funded is nothing like the Japanese crisis of the 90's. Japan had a positive domestic savings rate (and a good one) from which the government could borrow. Japan was not reliant on foreigners to provide the funding the government needed to borrow. The US must get a significant amount of its funding from foreigners as the US in aggregate has a negative savings rate. What it cannot borrow domestically and overseas, it will print. This threatens the status of the US Dollar as the world's reserve currency. A benefit that I cannot understate. It means everything for the standard of living in this country.

    Take Care,
    Brian



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  3. #2
    Quote Originally Posted by rp4prez View Post
    A friend of mine writes a select few of us these fabulous emails about what's going on with the markets etc. I got his permission to share it so without further adue here is his message.

    Side note: One thing he mentions in here I think makes way for the Amero.
    Good letter. Probably too long. Lawmakers believe that they have the exclusive right to produce more than one page of paper for consideration (they like to create laws in the thousands of pages). I'm sure they quickly glaze over all correspondences right now to simply tally either yah or nay.

    Also interesting was the replacement currency he mentions. He doesn't name the Amero though, and I doubt that would ever be the name of a currency. How about a UN or World currency?

    I made the following three predictions several years ago:

    1) The debt bubble burst would result in the Fed owning the majority of the debt (and essentially the property).
    2) Money Market accounts would start to break the buck.
    3) The US Dollar would be intentionally destroyed, to be replaced by a new currency, a joint effort of the World Bank, IMF and UN (and existing Reserve Banks of course).

    I was quite surprised that 1 and 2 occured within a week of each other. I would guess that 3 will take much longer (measured in years, not days).

  4. #3
    Quote Originally Posted by Brian4Liberty View Post
    3) The US Dollar would be intentionally destroyed, to be replaced by a new currency, a joint effort of the World Bank, IMF and UN (and existing Reserve Banks of course).

    I was quite surprised that 1 and 2 occured within a week of each other. I would guess that 3 will take much longer (measured in years, not days).

    well according to a report from Reuters on Sept. 16th, a Chinese paper agrees with your #3


    China paper urges new currency order after "tsunami"
    By Chris Buckley

    source

    BEIJING, Sept 17 (Reuters) - Threatened by a "financial tsunami," the world must consider building a financial order no longer dependent on the United States, a leading Chinese state newspaper said on Wednesday.

    The commentary in the overseas edition of the People's Daily said the collapse of Lehman Brothers Holdings Inc "may augur an even larger impending global 'financial tsunami'."

    The People's Daily is the official newspaper of China's ruling Communist Party, and the overseas edition is a smaller circulation offshoot of the main paper.

    Its pronouncements do not necessarily directly voice leadership views. But the commentary by a professor at Shanghai's Tongji University, as well as an essay in a Party journal, underscored official alarm at the turmoil in world financial markets.

    China's central bank earlier this week cut its lending rate for the first time in six years, a move analysts said was aimed at bolstering the economy and the battered stock market.

    "The eruption of the U.S. sub-prime crisis has exposed massive loopholes in the United States' financial oversight and supervision," writes the commentator, Shi Jianxun.

    "The world urgently needs to create a diversified currency and financial system and fair and just financial order that is not dependent on the United States."...

    read rest of article here

  5. #4
    Quote Originally Posted by RSLudlum View Post
    well according to a report from Reuters on Sept. 16th, a Chinese paper agrees with your #3
    That would probably be the single biggest monkey-wrench in their plans. I would not be surprised if we ended up with a one-world currency (but ex-China/Russia)...

  6. #5
    Quote Originally Posted by Brian4Liberty View Post
    Good letter. Probably too long.
    I agree with you that's why he sent an email out to others that you can send to your senators and representative.

    Dear Senator or Representative,

    I want to make it clear that I do not support a bailout in any form!

    A bailout will be hazardous to the United States and our freedom. All of the parties responsible in this mess should be held accountable. This starts first and foremost with the Federal Reserve and our fractional reserve banking system. It continues with the undisciplined decisions made by our commercial banks, investment banks, lending institutions, and irresponsible homeowners. Finally, the unsound decisions of Congress in perpetuating this mess are also to blame. These proposals elevate moral hazard to levels never before seen in the history of the world. And this is supposed to be a free country with a free market system? Stop the insanity now. Attempting to throw newly created money at the problem will only make the problem grow worse for our children. It will in no way aid the current situation, but will make it worse. We do not need more lending in this country (as is being espoused), we need more saving. The excesses and capital mis-allocation must be cleansed from the system. This is a natural part of the economic cycle and continued interference with it will only result in a worse crisis. Failing to allow the system to cleanse itself in a free market manner will usher in a depression (not long in coming) considerably worse than the depression we may or may not encounter by taking our medicine now. Supporting such a plan will end super power status of the United States and the US Dollar will undoubtedly lose the status of being the world's reserve currency! And this Congress and presidential administration will go down in the history books as having allowed it to happen. Our hope for the future relies on the strength of our currency. And this proposal will obliterate our currency. Punting the problem further down the road to another set of politicians will not absolve you of what you have sponsored. You have the chance to do the right thing and prove that this a country that still holds freedom and liberty in the highest regard and that we can have free markets once again (because we have anything but free markets at present). Failure to do the right thing will result in you being looked upon unkindly in the annals of history.

    There are numerous things that are blatantly wrong in this bailout proposal. But I want to call particular attention to the dictatorial rights being asserted in the Treasury bailout proposal. I cannot believe that this is happening in the United States of America. I was pale when I read it. I am referring to the part of the plan that specifies that actions by the Treasury under its authority are unreviewable by the judicial branch (in fact, any court or government agency). Additionally, the proposal states that the Treasury has the authority to purchase a range of assets, including mortgage loans, mortgage backed securities, and commercial mortgage related assets. But it also states that "other assets", in consultation with the Fed Chairman, can be purchased as deemed necessary to effectively stabilize financial markets. This is far too much power in the hands of the government and leaves the proposal open-ended. And I might add, far too much power granted to a government that has publicly stated that everything was fine, but completely mismanaged the financial compass of this country (over the course of several administrations).

    To this last point, Treasury Secretary Paulson is on record saying that "we're literally maybe days away from a complete meltdown of our financial system". He has urged that passing this legislation must be done quickly and it is better than the alternative of doing nothing. Federal Reserve chairman Ben Bernanke agrees. Better for whom? I know ... and it is not the taxpayer. But I would ask how would Bernanke and Paulson know? It was merely a month ago that Paulson was reiterating to anyone listening, the soundness of our banking system. Either Bernanke and Paulson did not see any of this coming ... or they lied. Neither is good. Yet, Congress and the people of this country are supposed to trust that they know the solution?

    I urge you to not rush through this process. Please take the time to dissect and challenge the proposals. It is not acceptable that such crucial legislation be fast-tracked through Congress so that politicians can go campaigning for the next election at the end of the week. Not taking the time to properly vet these proposals because you think you have other priorities is not performing your duties as a senator or representative.

    I urge you to filibuster (for those in the Senate) any bailout legislation. I urge you to vote "NO" to any type of bailout legislation.

    I want to make it clear that I will never again vote, nor provide financial support, for any politician that supports these measures. And I will go out of my way to encourage others to do the same.

    Thank you for your time.

    Also interesting was the replacement currency he mentions. He doesn't name the Amero though, and I doubt that would ever be the name of a currency. How about a UN or World currency?
    I emailed him back about the Amero and he agrees if this bill passes it's a very good opportunity for something like the Amero if not the Amero to come into play.

    I made the following three predictions several years ago:

    1) The debt bubble burst would result in the Fed owning the majority of the debt (and essentially the property).
    2) Money Market accounts would start to break the buck.
    3) The US Dollar would be intentionally destroyed, to be replaced by a new currency, a joint effort of the World Bank, IMF and UN (and existing Reserve Banks of course).

    I was quite surprised that 1 and 2 occured within a week of each other. I would guess that 3 will take much longer (measured in years, not days).
    Good calls on all of those. I have thought about #3 but didn't know about 1 or 2 until recently.

  7. #6
    Quote Originally Posted by rp4prez View Post
    A friend of mine writes a select few of us these fabulous emails about what's going on with the markets etc. I got his permission to share it so without further adue here is his message.

    ...

    * It looks to me that the $700 billion being touted in the bailout plan seems to be the $500 billion suggested on Friday plus the $200 billion announced in the Treasury's new "Supplemental Financing Program" ... http://newyorkfed.org/markets/statement_091708.html). Where do they get the $700 billion? They will auction off more treasury debt, which will suck in US Dollars that have been taken out of circulation as they are residing as reserves in foreign Central Bank vaults and other foreign investor accounts. Thus, this is just as inflationary as money printing because these "dungeon dollars" do not compete for goods and services at present (they are held as reserves). But once they are unleashed ... watch out. Any shortfall in treasury financing will be met simply with quantitative easing by the Federal Reserve (money printing). Also note that the $700 billion is simply a balance sheet item and not an expenditure limit. They can go back for more. Finally, this $700 billion is in addition to all of the other lending programs and bailouts already in service. The total number is approaching $2 trillion. And while we may get some of this back, I do not believe that $700 billion is going to be the total spent under the bailout plan. This number could easily be $1 trillion, if not more. I think we are probably talking about $1.5 -> $2 trillion total when all is said and done. Meanwhile, we will be creating an even bigger problem down the road. As opposed to the less expensive option of taking our medicine now and allowing the free market to purge the mis-allocation of capital and excesses (of course, Wall Street hates this idea as do the politicians that want homeowner bailouts). Of course, politicians always view this option as political suicide. But we need to let them know it is political suicide if they do not elect this option.
    I was googling some info and happened to find something that looked familiar. :-)

    I did have an update to the above, correcting and clarifying something in the first bullet. Here it is ...

    Part I

    The Treasury selling treasury debt in and of itself is not expanding the money supply. Foreign Central Banks buy treasury debt to invest their US Dollars (acquired via trade, with some/many of those Dollars kept semi-permanently due to the trade deficit). US Dollars held in foreign Central Bank reserves or foreign private investor accounts are part of the money supply as the Central Bank/investor is holding the financial instrument(s) (let's say treasuries) and in this case, the US government gets the cash from the sale of these treasuries (unless they are bought on the secondary market, then the seller gets the cash) and spends it back into circulation.

    An exception to this would be US Dollars (not held by Central Banks as they would be invested in some US financial instrument, but maybe held in cash currency by private investors or stashed drug proceeds) that are not really part of the circulating money supply (what I call "dungeon money"). US currency buried in the back yard or in the mattress also qualifies (No, I do not have any money buried in my back yard, so do not come looking. And I have a killer cat and plenty of scary wildlife that prefer to hang out in our garden). And thus, their return to circulation via treasury debt sales (or any purchase) would actually be inflationary as they would then once again compete for goods and services. I think that this amount is relatively quite small.

    But again, we do not need to increase the money supply at all to experience massive inflation. All that needs to happen is a drop in confidence of the US Dollar (taking on too much debt is one thing that can cause this, creating too much new money is another). Foreigners might then liquidate some or all of their US Dollar financial investments and trade them for tangible goods and services in the US, as well as precious metals. Obviously this is inflationary as there would be more Dollars competing for goods and services in the US.

    Part II

    But this also brings up a point I have discussed in the past and would like to reiterate.

    With what has been proposed thus far (various bailout proposals), we truly do not know if, in fact, there will be any new money created. This is why I still fear deflation as a possibility. You have seen me write about the sterilization operations conducted by the Fed in its newly conceived lending operations - late 2007 and 2008 (sterilizing nearly every dollar that has been lent out such that reserves only increase enough to keep the fed funds rate at its target). These operations have had virtually no impact on the monetary base because as with each lending operation conducted by the Fed, reserves were being drained via Fed treasury sales from their own portfolio. The Fed was lending out cash or treasuries themselves for bad debt. Now the Fed balance sheet is full of bad debt that the free market did not want to buy. This drainage of reserves (sterilization) also reduced the amount of cash that the healthier banks could lend as they were lending to the government (treasuries) instead of lending cash out into the economy. This is a perfect example where government debt crowds out investment in the economy. Note that most of the increases in our money supply are actually created by the banks (fractional reserve lending) and not the Fed itself. The banks generate growth in the economy by making credit available. Right now, credit is not very available.

    With this additional $700 billion proposal (or whatever its costs), our government will first attempt to sell treasury debt to finance it. Now, this could precipitate a run on the Dollar which would be very inflationary (and we could eventually lose reserve currency status). But again, selling treasury debt in and of itself is not expanding the money supply.

    Now, if the Treasury is not able to completely finance this by selling treasury debt, then quantitative easing by the Fed (creating new money) is the only answer. Also, if foreign investors lose confidence in the Dollar, they may not only refrain from financing this operation, they may dump some or all of their existing Dollar based holdings. Again, quite inflationary.

    But nothing that has happened thus far or been proposed in the bailout package(s) actually increases the money supply. I think that whether or not new money is created will be determined by foreign investors of our debt and the bond market in general. I do expect that foreigners will demand a much higher rate of interest for their purchases (it may take some time for this to develop). Thus, we see higher interest rates whether we sell treasury debt, we create new money, or a combination of the two.

    Thus far, Helicopter Ben has not been Helicopter Ben. The Fed has been more like the Fed of the Great Depression era when they allowed deflation to happen. Of course, the circumstances are different now. Foreign investors are going to play a huge role in deciding whether inflation or deflation occurs. As will credit and interest rate derivatives.

    Brian



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