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Bailing Out Banks

by Ron Paul | April13, 2008
Texas Straight Talk

There has been a lot of talk in the news recently about the Federal Reserve and the actions it has taken over the past few months. Many media pundits have been bending over backwards to praise the Fed for supposedly restoring stability to the market. This interpretation of the Fed's actions couldn't be further from the truth.

The current market crisis began because of Federal Reserve monetary policy during the early 2000s in which the Fed lowered the interest rate to a below-market rate. The artificially low rates led to overinvestment in housing and other malinvestments. When the first indications of market trouble began back in August of 2007, instead of holding back and allowing bad decision-makers to suffer the consequences of their actions, the Federal Reserve took aggressive, inflationary action to ensure that large Wall Street firms would not lose money. It began by lowering the discount rates, the rates of interest charged to banks who borrow directly from the Fed, and lengthening the terms of such loans. This eliminated much of the stigma from discount window borrowing and enabled troubled banks to come to the Fed directly for funding, pay only a slightly higher interest rate but also secure these loans for a period longer than just overnight.

After the massive increase in discount window lending proved to be ineffective, the Fed became more and more creative with its funding arrangements. It has since created the Term Auction Facility (TAF), the Primary Dealer Credit Facility (PDCF), and the Term Securities Lending Facility (TSLF). The upshot of all of these new programs is that through auctions of securities or through deposits of collateral, the Fed is pushing hundreds of billions of dollars of funding into the financial system in a misguided attempt to shore up the stability of the system.

The PDCF in particular is a departure from the established pattern of Fed intervention because it targets the primary dealers, the largest investment banks who purchase government securities directly from the New York Fed. These banks have never before been allowed to borrow from the Fed, but thanks to the Fed Board of Governors, these investment banks can now receive loans from the Fed in exchange for securities which will in all likelihood soon lose much of their value.

The net effect of all this new funding has been to pump hundreds of billions of dollars into the financial system and bail out banks whose poor decision making should have caused them to go out of business. Instead of being forced to learn their lesson, these poor-performing banks are being rewarded for their financial mismanagement, and the ultimate cost of this bailout will fall on the American taxpayers. Already this new money flowing into the system is spurring talk of the next speculative bubble, possibly this time in commodities.

Worst of all, the Treasury Department has recently proposed that the Federal Reserve, which was responsible for the housing bubble and subprime crisis in the first place, be rewarded for all its intervention by being turned into a super-regulator. The Treasury foresees the Fed as the guarantor of market stability, with oversight over any financial institution that could pose a threat to the financial system. Rewarding poor performing financial institutions is bad enough, but rewarding the institution that enabled the current economic crisis is unconscionable.

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piecing together the story on the housing side

I've been trying to piece this situation together myself, it was a whopping big check the government wrote. Hope I'm not too long here but it needs to be said. I haven't seen an explanation of the housing side of the story but surmise that something happened two years ago that allowed the essentially short term loans to be made (payment change over 2 years). It makes sense, as you say from the Wall Street side, that the reason was to stave off a recession. Maybe few complained because everyone wants prosperity, democrats kept quiet also because they're tired of being blamed by republicans for getting in the way of industry (these days the Coast Guard is afraid to stop a merchant ship from ramming a bridge for same). Even with some lenders practicing fraudulent lending practices, the FBI was not there till the last, that is a curiosity, everybody was talking and writing about these loans. These "crazy loans" to home buyers, are the crux of the problem. The task now is to ease these properties back into the market but not all at once because you also have refi's out there that stand on an equity that is conditional with a typical bank agreement, likewise a lot else that is tied to this stability. The short term low payment--long term high payment loan must be ended if not already legislated out. Reading the paper it sounded very scary that Wall Street might start a world calamity. It looked real, could have been staged by firms desperate to get bailout, it could be something else. What is so unique in this market is that property is such a huge asset in the country, it can't handle volitility, just like the Titanic couldn't ram iceburgs, otherwise, I think the market was ok in it's structure. One reservation, provided it doesn't rip off those that also finance our national debt.

"..the next speculative bubble.."

"...the next speculative bubble, possibly this time in commodities..."

Does this mean that everyone who is buying silver and gold is buying into another bubble?

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"No man has a natural right to commit aggression on the equal
rights of another, and this is all from which the laws ought to restrain him." --Thomas Jefferson

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Libertas, Pax, Prosperitas

I would be wary of putting

I would be wary of putting money in gold & silver, especially gold. Despite what hanging out on alternative investment blogs and listening to snake oil salesmen may make one think, a large, perhaps the largest, component of gold demand is still jewelry, which is unlikely to exactly sizzle during a global recession.

Also, until the Gov/Fed officially accept they will never repay the national debt; there are limits to how lax Benny B can be. Print too aggressively, and foreigners will simply balk at buying treasuries at anywhere near today’s rates, which will dramatically lower the amount of money available for politicos to hire relatives and pay off campaign contributors with.

The next speculative bubble!

Not only your stock in Gold and Silver. But, In pork bellies as well. Right now I believe it will be in corn. We see the foreign market complaining and rioting over lack of corn because we are using corn to produce ethanol in the USA as an alternative to gasoline........... Such a farce. We have the design and technology to use hydrogen and refuse to implement it due to promises to oil company's that own America! Hydrogen should be the bubble. But it Would create an oil demise and less movement over the dollar! Major Oil Corporations that lobby the USA Inc.Are in it for the money they have to much invested to fall bankrupt to a simple available fuel such as Hydrogen!

Hydrogen not a real option yet..

I'm all for alt. energy, and I totally agree that ethanol isn't really a viable option (its got a much lower total BTU output per pound then gasoline or diesel does). Bio-diesel is a much better choice then Ethanol.

Hydrogen isn't near as easy as some people would have you believe. It has to be split from fossil fuels (the majority of it comes from exactly that right now) or converted from generated electricity and water. The process to do that isn't really all that efficient right now. Basically Hydrogen is just another battery technology, useful for EVs but not an end in itself. We should focus on producing efficient and effective plug in hybrids and then straight electric vehicles. But even that will require huge overhauls on the electric infrastructure. A Prius can go about 7 miles on the battery alone (a 1.3KWh pack). If you figure the average driver needs 4-5 times that daily, or 6.5-8KW per car, combine that with 2 cars and you have a household energy consumption equal to half the average monthly usage of a 2500sq foot home, and thats not counting energy lost during the charging cycle (8KW into the battery would probably consume 10KW or more from the grid). Electric SUVs would consume even more. Grid capacity would easily need to increase 75% or more.

I haven't even covered the fact that currently the only way to make a fuel cell involves platinum and we just don't have enough of it on the planet. I suspect that will change but we certainly don't have the "tech" yet to do it on any sort of massive scale.

I don't think any one fuel is the answer, I believe it will be a combination of things. I think deregulation on alot of levels would really help things speed up. Imagine a small local startup that buy's waste oil from local restaurants (they usually pay to have it hauled off) and converts it to B100 biodiesel (or even various mixes with dino-diesel) and sells it at a locally owned pumping station. B100 costs about 80 cents a gallon to make with free waste oil so they could sell it for 3$ or more, still be cheaper then dino oil and make some good profit. I suspect it hasn't happened yet not because its not fesable but because of excessive permitting and regulations.

I Disagree Hydrogen Is The Answer

There is a process called crack electrolysis that enables the separation of hydrogen from water very quickly and with little electricity. But that is "fringe" science, so I won't delve into that. But solar electricity production is growing exponentially. Solar systems are becoming much more efficient and less expensive. A solar powered electrolysis station is "right now" technology and quite practical. Hydrogen is the answer for mobile fuel. It is happening in Europe right now, and will arrive here soon whether the US oil companies like it or not.

http://www.youtube.com/profile?user=JohnFromChicago

No doubt about it. Going to

No doubt about it. Going to Hydrogen will require a complete change of infrastructure. Not going to happen overnight. Ethanol is great, but not when you have to make it from the cereal crops that people depend on for food. I've been watching a company called United States Sustainable Energy Corporation and they have come up with a process by which they can take various kinds of biomass, palm waste, corn cobs, whatever, and turn it into ready to use biodiesel and biogasolines. In addition to that, there is a further upside in that the only byproducts are burnable gas, that is fed back into the system, and fertilizer. It almost seems to good to be true. But don't take my word for it. Check it out John Rivera's process by watching the SSTP central america Guatamala video.

http://jhrivera.com/

Things are only impossible until they are not.
-- Jean Luc Picard

Things are only impossible until they are not.
-- Jean Luc Picard

The automobile age is winding down.

Good points bp_968, about hydrogen.

Maybe, just maybe an energy source as plentiful and economical as petroleum will be developed. I have my doubts. Even if it does, will it be in the time frame that is needed to continue or current transportation paradigm? Will it be economical? What will be the costs for consumers and the commercial transportation infrastructure to make the switch? Most importantly, will it be online before massive disruptions ensue?

Personally, I think we are in the tenth or eleventh hour of oil as an economically viable energy source for transportation- nothing else is ready to take it's place. The larger issue to me is why do we continue to assume that the notion of everyone driving their own car ( or F-250) for every possible purpose will continue to remain viable ? This mindset and assumption is so ingrained in Americans that it is very very difficult for these types of discussions to occur without this being a fundamental and un-questioned baseline assumption. I don't think it's likely that we will continue in our en masse, happy motoring paradigm for much longer.

IMO, it would be prudent to consider alternative scenarios for our future, given the unique nature of petroleum and our absolutely staggering dependence on it.

Excellent observation. I

Excellent observation. I agree we could be running out of time for the car like we know it today. The fact is though, the US is built around the idea of a car. Vast areas of land now used as suburbs would become worthless without cars to get you where you need to go. I could see us going (possibly) to some sort of hub system that takes you to commerical/industrial areas (IE jobs). But the whole thing would collapse without cars. We are not like europe. We have VASTLY more space per person here then anywhere in western europe.

Its not going to be an easy problem to fix no matter how you look at it.