Dr. Ellen Brown writes: In July, Treasury Secretary Henry Paulson said of his massive underwriting scheme for Fannie Mae and Freddie Mac, “If you have a bazooka in your pocket and people know it, you probably won’t have to use it.”  On September 7, Paulson pulled out his bazooka and fired, effectively nationalizing the mortgage giants.  Last week, Paulson pulled out the bazooka again and held it to Congress’s head.  “Seven hundred billion dollars or your credit system will collapse!”  Seven hundred billion dollars is more than the country currently pays annually for Social Security; and for what do we owe this ransom?  To bail out bankers from their own folly in speculating in a giant derivative Ponzi scheme that is now imploding.  But policymakers justify rewarding the guilty parties at the expense of the taxpayers by arguing that “we have to do it to save the banking system.”

Abraham Lincoln was faced with a similar situation when he stepped into the Presidency in 1861.  The country was suddenly in a civil war, and there was insufficient money to fund it.  The British bankers, knowing they had him over a barrel, agreed to lend him money only at 24 to 36% interest, highly usurious rates that would have bankrupted the North.  Our fearless forefather said, “Thanks but no thanks, I’ll print my own.”  Issuing the national currency is the sovereign right of governments.  A government does not need to borrow its national currency from bankers “merely pretending to have money.”  That was the phrase used by Thomas Jefferson when he realized the bankers’ “fractional reserve” lending scheme meant that they were lending the same “reserves” many times over.

The federal dollars issued by Lincoln were called U.S. Notes or Greenbacks.  They allowed the North not only to win the Civil War but to create the greatest industrial giant the world had ever seen.  Lincoln’s government launched the steel industry, created a continental railroad system, promoted a new era of farm machinery and cheap tools, established free higher education, provided government support to all branches of science, organized the Bureau of Mines, increased labor productivity by 50 to 75 percent.  The Greenback was not the only currency used to fund these achievements; but they could not have been accomplished without it, and they could not have been accomplished on money borrowed at 30% interest.

There are other historical examples.  In the 1930s, Australia and New Zealand avoided the Depression conditions suffered elsewhere by drawing on a national credit card issued by publicly-owned central banks.  The governments of the island states of Guernsey and Jersey have been issuing their own money for two centuries, creating thriving economies without carrying federal debt.

In none of these models has government-issued money created dangerous price inflation.  Price inflation results either when the supply of money goes up but the supply of goods doesn’t, or when speculators crash currencies by massive short selling, as in those cases of Latin American hyperinflation when printing-press money was used to pay off foreign debt.  When new money is used to produce new goods and services, price inflation does not result because supply and demand rise together.  Prices increased during the American Civil War, but this was attributed to the scarcity of goods common in wartime.  War produces weapons rather than consumer goods.

Today in most countries, money is created privately by banks when they make loans; but the banks create only the principal, not the interest necessary to pay the loans back.  The interest must be borrowed into existence, continually increasing the money supply, in a Ponzi scheme that has reached its mathematical limits.  The latest desperate proposal for propping up this collapsing system is to deliver $700 billion of taxpayer money to ex-Goldman Sachs CEO Henry Paulson to buy unmarketable derivative paper from the banks, shifting the loss on this dodgy paper from the banks to the taxpayers.  Seven hundred billion is just the opening figure; losses on the imploding derivatives pyramid could wind up being in the trillions.  And where will this money come from?  It will no doubt be borrowed into existence from the banking system.  We the people will be in the anomalous position of paying interest on a debt to the banks to bail out the banks!  At the very least, doesn’t it seem that the banks should be paying interest on the $700 billion to us?

Rather than propping up an unsustainable system with taxpayer money, it may be time to let the private money-making scheme collapse and replace it with something better.  Banks that have thrived in an unregulated free market should be left to work out their fates in that market.  If they go bankrupt, they can be put into receivership and reorganized in return for an equity interest in the banks, as was done recently with AIG.  The government would then own a string of banks, which could issue “the full faith and credit of the United States” directly, returning the country to productivity and prosperity just as Lincoln did. (09/29/08)
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Michael E. Lewitt writes: The problem with trying to legislate in the middle of a revolution is
that you aren’t sure whether you are governing the world that is being
destroyed or the one that is coming into being.

There can be little
question that the Wall Street that existed at the beginning of this
year is no longer the industry that Congress is seeking to rescue from
its own excesses. The financial world has been permanently altered by
the collapse of the debt bubble that inexorably built up over the past
three decades.

Now Congress is trying to design a rescue plan for a
world whose shape is highly contingent and unstable. Such an
undertaking requires more than two weeks of work. Conventional thinking
tells us that the government must do something to stabilize the markets
immediately, and that doing something is better than doing nothing.
Once again, conventional thinking is wrong. Congress would be much
better advised to take the extra few days or week it would take to
structure a plan that the world is going to have to live with for a
very long time.

HCM (Hegemony Capital Management) has been warning for years that all of the king’s horses
and all of the king’s men wouldn’t be able to put this mess back
together again. It is now time for America to take the pain and figure
out how to move forward. Any plan that is adopted must include a
sufficient dose of strong medicine to prevent the culture of
self-delusion and moral hazard that created the current crisis from
further perpetuating itself. The purpose of the Paulson Plan has to be
to rebuild confidence in the financial system. The manner in which the
plan was presented and debated rendered that more difficult but
hopefully not impossible. For any plan that fails to bring confidence
back to the market will not work.

The great economic historian Charles Kindleberger wrote in his seminal study of financial crises, Manias, Panics, and Crashes,
that, “[f]or historians each event is unique. Economics, however,
maintains that forces in society and nature behave in repetitive ways.
History is particular; economics is general.”

This is a
very important observation. While each financial crisis is unique in
terms of its causes and the types of assets that it engulfs, the
conditions that led to it are always driven by human irrationality and
hubris. Financial busts are preceded by financial bubbles. The current
bust was preceded by a debt bubble whose unique manifestations were
debt securitization and credit derivatives. Underlying these novel debt
structures were the human emotions of greed and fear that led to abuses
by even the most sophisticated individuals and most highly respected
institutions in the market. While these human attributes are the most
difficult to legislate, their ability to wreak havoc is clear evidence
that they must be regulated in a thoughtful way. (09/29/08)
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Dean Baker writes: If you have a real story, you don’t have to make up phony stories. That’s pretty straightforward.

I’ve heard lots of phony stories. Much of the country’s political and economic leadership has been running around raising the prospect of the Great Depression and a breakdown in the banking system (I actually had taken the latter seriously). These stories are absolutely not true.

There is no plausible scenario under which the no bailout scenario gives us a Great Depression. There is a more plausible scenario (but highly unlikely) that the bailout will give us a Great Depression. There is no way that the failure to do a bailout will lead to more than a very brief failure of the financial system. We will not lose our modern system of payments.

At this point I cannot identify a single good reason to do the bailout.

The basic argument for the bailout is that the banks are filled with so much bad debt that the banks can’t trust each other to repay loans. This creates a situation in which the system of payments breaks down. That would mean that we cannot use our ATMs or credit cards or cash checks.

That is a very frightening scenario, but this is not where things end. The Federal Reserve Board would surely step in and take over the major money center banks so that the system of payments would begin functioning again. The Fed was prepared to take over the major banks back in the 80s when bad debt to developing countries threatened to make them insolvent. It is inconceivable that it has not made similar preparations in the current crisis. …

Finally, the bailout absolutely can make things worse. We are going to be in a serious recession because of the collapse of the housing bubble. We will need effective stimulus measures to boost the economy and keep the recession from getting worse.

However, the $700 billion outlay on the bailout is likely to be used as an argument against effective stimulus. We have already seen voices like the Washington Post and the Wall Street funded Peterson Foundation arguing that the government will have to make serious cutbacks because of the bailout.

While their argument is wrong, these are powerful voices in national debates. If the bailout proves to be an obstacle to effective stimulus in future months and years, then the bailout could lead to exactly the sort of prolonged economic downturn that its proponents claim it is intended to prevent.

In short, the bailout rewards some of the richest people in the country for their incompetence. It provides little obvious economic benefit and could lead to long-term harm. That looks like a pretty bad deal. (09/29/08)
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David Sirota writes: There’s news this Sunday afternoon of a congressional deal to bailout Wall Street fat cats with $700 billion of taxpayer cash.

Though the deal negotiated between congressional leaders and the White House is better than what Treasury Secretary Henry Paulson originally proposed early last week, it remains an insulting atrocity, having omitted even basic aid to homeowners, bankruptcy reforms and any modicum of future financial industry regulation.

Now, the New York Times reports that the Democratic leadership may not have the votes to pass this bailout. So without further ado, here are the top 5 reasons (in no order) why every single member of Congress - Democrat and Republican - should vote this sucker down.

1. BAILOUT’S INHERENT FISCAL INSANITY COULD MAKE PROBLEM WORSE …

2. EXPERTS ON BOTH THE LEFT AND RIGHT SAY THIS BAILOUT COULD MAKE THINGS WORSE …

3. THERE ARE CLEARLY BETTER AND SAFER ALTERNATIVES …

4. ANY INCUMBENT VOTING FOR THIS PUTS THEMSELVES AT RISK OF BEING THROWN OUT OF OFFICE …

5. CORRUPTION AND SLEAZE ARE SWIRLING AROUND THESE BAILOUTS - AND AMERICA KNOWS IT …

If this bill passes, it will be a profound referendum on the dominance of money over democracy in America. That - and that alone - would be the only thing an objective observer could take away from the whole thing.

Money will have compelled politicians to not only vote for substantively dangerous policy, but vote for that policy even at their own clear electoral peril. Such a vote will confirm that the only people these politicians believe they are responsible for representing are are the fat-cat recipients of the $700 billion - the same fat cats who underwrite their political campaigns, the same fat-cats who engineered this crisis, and want to keep profiteering off it. Any lawmaker who takes that position is selling out the country, as is any issue-based political non-profit group - liberal or conservative - that uses its resources to defend a “yes” vote rather than demand a “no” vote. This is a bill that forces taxpayers to absorb all of the pain, and Wall Street executives to reap all of the gain. It doesn’t even force the corporate executives (much less the government leaders) culpable in this free fall to step down - it lets them stay fat and happy in their corner office suites in Manhattan.

Even if they believe that something must be done right now, lawmakers should still vote no on this specific bill, and force one of the very prudent alternatives to the forefront. They shouldn’t just vote no on Paulson’s proposal - they should vote hell no. Our economy’s future depends on it. (09/29/08)
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Bloomberg — In addition to the $700 Billion Bailout before congress today, the Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.

The Fed increased its existing currency swaps with foreign central banks to $620 billion from $290 billion to make more dollars available worldwide. The Term Auction Facility, the Fed’s emergency loan program, will expand to $450 billion from $150 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.

The Fed’s expansion of liquidity, the biggest since credit markets seized up last year, comes as Congress prepares to vote on a $700 billion bailout for the financial industry. The crisis is reverberating through the global economy, forcing European governments to rescue four banks over the past two days alone.

“Today’s blast of term liquidity will settle the funding markets down, and allow trust to slowly be restored between borrowers and lenders,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. On the other hand, “the Fed’s balance sheet is about to explode.” (09/29/08)
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