FacebookTwitterGoogle+RedditEmail

Why the Bailout Will Fail

Treasury Secretary Paulson’s grand scheme to buy $700 billion of toxic derivatives from ailing financial institutions is a pipe dream that logic and history show will not work. The Paulson plan is nothing but manna from heaven for distressed institutions. No doubt there will be a momentary burst of confidence and markets will rally but longer term serious problems remain.

The bailout is an attempt to bring confidence back to the lending market that has seized up in fear and is not making loans. The concern is that the cessation of liquidity and lending will exacerbate the meltdown on Wall Street and ripple broadly into the economy. The Paulson plan fails to address the issue of fear that is behind the crisis.

History shows the Plan is Doomed to Fail

Over the past few weeks we have been consistently told that we face an epic crisis comparable to the 1929 stock market crash with its ensuing Great Depression of the 1930’s. So why are the lessons of the Great Depression being ignored?

During the Great Depression lending similarly dried up and confidence swooned. Lending and borrowing came to a standstill. The Lesson of the Great Depression was that it is next to impossible to get institutions to lend and companies/consumers to borrow once fear sets in. Renowned economist John Maynard Keynes said that trying to get banks to lend and borrowers to borrow during a banking crisis is like trying to “push on a string”—in other words it is impossible. Similarly in the 1990’s the Bank of Japan found trying to resuscitate lending in the wake of the Japan’s stock market collapse was impossible. The Bank of Japan even went to the extreme of making interest rates negative, in other words they paid you to borrow, and it proved ineffectual.

While pushing on a string refers to monetary policy, which the Fed has kept lose, and the Paulson plan is about buying assets they are similar because they are attempts to get banks to lend. Buying the bad assets of institutions is going to at best provide a temporary return to lending. Ultimately you can lead a horse to water but you cannot make him drink.

“All we to Fear is Fear Itself”

In his first inaugural speech FDR voiced the greatest challenge facing America and the world at the time when he said, “All we have to fear is fear itself”. Today fear has again set into the financial markets and is beginning to spread. Turning this tide is next to impossible.

The market runs from the extremes of greed to fear and once a mentality sets in its stays for a very, very long time. Nobel Prize winning economist Robert Mundell described the renitence of consumers to buy things in the 1930’s as a deflation (falling prices) mentality. Because demand fell off a cliff retailers were forced to reduce prices to sell their products. Consumers eventually realized that by postponing their purchases they could save money. As they held off buying retailers were forced to reduce prices further to entice buyers. This created a self fulfilling spiral pushing prices lower that eventually had many buyers forgoing buying totally.

Admit that Reaganomics and Free Markets Don’t Work
The unfortunate thing is that the Bush Administration and Republicans refuse to admit that the problem we are suffering from today is the failure of free market and Reaganomic ideology. The cause of our current problems from the meltdown on Wall Street, to higher gas prices, to higher food prices can be traced squarely to the failure of free market/neoliberalism/Reaganomics ideology.( See “Higher Gas Prices: The Failure of Free Markets and Reaganomics)

Government needs to regulate and get rid of the excesses created by the free market’s binge of the past few decades. Bold and aggressive initiatives such as the government seizing control of financial institutions are needed at this time. Fear has set in and throwing good money at bad as we have done successively with bailouts since the 1987 stock market crash have not worked. Bailouts create a moral hazard and reckless behavior that necessitate further bailouts where eventually you reach a point where the size of the bailout bill is insurmountable. Today we are being forced to fork over a massive $700 billion.

Capitalism is failing again as it did during the 1930’s with the Great Depression. They say “fool me once shame on you, fool me twice shame on me.” How many more times will we allow our self to be fooled? Free market ideology does not work! Bold initiatives that empower “we the people” are needed.

MADIS SENNER is a former global money manager turned faith based activist. His Freedom Global Income Fund was the top performing mutual fund in the late 1980’s. He has written for the NY Times, Barrons and others. He is author of Japanese Euroderivatives (Euromoney 1990). He can be reached at madiss(at)verizon.net.

Your Ad Here
 

 

 

 

More articles by:
August 16, 2018
Bruce E. Levine
“Don’t Be Stupid, Be a Smarty”: Why Anti-Authoritarian Doctors Are So Rare
W. T. Whitney
New Facebook Alliance Endangers Access to News about Latin America
Ramzy Baroud
Mission Accomplished: Why Solidarity Boats to Gaza Succeed Despite Failing to Break the Siege
Larry Atkins
Why Parkland Students, Not Trump, Deserve the Nobel Peace Prize
William Hartung
Donald Trump, Gunrunner for Hire
Yves Engler
Will Trudeau Stand Up to Mohammad bin Salman?
Barbara Nimri Aziz
Morality Tales in US Public Life?
Vijay Prashad
Samir Amin: Death of a Marxist
Binoy Kampmark
Boris Johnson and the Exploding Burka
Eric Toussaint
Nicaragua: The Evolution of the Government of President Daniel Ortega Since 2007 
Adolf Alzuphar
Days of Sagebrush, Nights of Jasmine in LA
Robert J. Burrowes
A Last Ditch Strategy to Fight for Human Survival
August 15, 2018
Jason Hirthler
Russiagate and the Men with Glass Eyes
Paul Street
Omarosa’s Book Tour vs. Forty More Murdered Yemeni Children
Charles Pierson
Is Bankruptcy in Your Future?
George Ochenski
The Absolute Futility of ‘Global Dominance’ in the 21st Century
Gary Olson
Are We Governed by Secondary Psychopaths
Fred Guerin
On News, Fake News and Donald Trump
Arshad Khan
A Rip Van Winkle President Sleeps as Proof of Man’s Hand in Climate Change Multiplies and Disasters Strike
P. Sainath
The Unsung Heroism of Hausabai
Georgina Downs
Landmark Glyphosate Cancer Ruling Sets a Precedent for All Those Affected by Crop Poisons
Rev. William Alberts
United We Kneel, Divided We Stand
Chris Gilbert
How to Reactivate Chavismo
Kim C. Domenico
A Coffeehouse Hallucination: The Anti-American Dream Dream
August 14, 2018
Daniel Falcone
On Taking on the Mobilized Capitalist Class in Elections: an Interview With Noam Chomsky
Karl Grossman
Turning Space Into a War Zone
Jonah Raskin
“Fuck Wine Grapes, Fuck Wines”: the Coming Napafication of the World
Manuel García, Jr.
Climate Change Bites Big Business
Alberto Zuppi - Cesar Chelala
Argentina at a Crossroads
Chris Wright
On “Bullshit Jobs”
Rosita A. Sweetman
Dear Jorge: On the Pope’s Visit to Ireland
Binoy Kampmark
Authoritarian Revocations: Australia, Terrorism and Citizenship
Sara Johnson
The Incredible Benefits of Sagebrush and Juniper in the West
Martin Billheimer
White & Red Aunts, Capital Gains and Anarchy
Walter Clemens
Enough Already! Donald J. Trump Resignation Speech
August 13, 2018
Michael Colby
Migrant Injustice: Ben & Jerry’s Farmworker Exploitation
John Davis
California: Waging War on Wildfire
Alex Strauss
Chasing Shadows: Socialism Won’t Go Away Because It is Capitalism’s Antithesis 
Kathy Kelly
U.S. is Complicit in Child Slaughter in Yemen
Fran Shor
The Distemper of White Spite
Chad Hanson
We Know How to Protect Homes From Wildfires. Logging Isn’t the Way to Do It
Faisal Khan
Nawaz Sharif: Has Pakistan’s Houdini Finally Met his End?
Binoy Kampmark
Trump Versus Journalism: the Travails of Fourth Estate
Wim Laven
Honestly Looking at Family Values
Fred Gardner
Exploiting Styron’s Ghost
FacebookTwitterGoogle+RedditEmail