Topic: Economics
Why the Big Bailout? There are many explanations for the bailout but how many actually address the roots of the problem?by Lou Poumakis
(libertarian)
Sunday, October 5, 2008
This past month has been an eye-opening experience for many Americans. We have seen the beginning and are still very much in the middle of the greatest economic disaster this nation has ever experienced. Many of us still don’t understand how or why this has happened. The simple explanation is that the Federal Reserve (our central bank), led by Alan Greenspan, continuously inflated the currency from the early ‘90’s until 2006, when Ben Bernanke replaced him. The ready availability of money at low interest rates led to the housing bubble which, when it finally broke as all bubbles must, in turn led to a proliferation of foreclosures and bad mortgage instruments which infected the portfolios of virtually all the major banks and investment institutions both in this country and the rest of the world. The lengthy inflation period, again through artificially induced low interest rates, introduced major distortions into every area of the economy. These distortions cannot be corrected other than through a recession which would flush out companies and corporations that need to be allowed to fail. The longer the readjustment is delayed, the deeper and longer the recession will be. We can look forward to a great deal more recession extending well into and possibly beyond 2009.
But why did this happen? The Fed kept the economy relatively stable since WW-2. How did it lose control? To answer this question, we need to appreciate the extreme fragility of the house of cards that was constructed when the Fed was created in 1913. Money is the life-blood of trade. Without money, money that people believe will hold its value in at least a predictable manner, trade is impossible. No one with any sense will trade real goods for money that may lose its value at any time. Prior to the creation of the Fed, only gold and silver was money. Banks created bank notes that were redeemable in gold or silver. Some of them cheated and created more notes than they had gold or silver to back up. This improved their bottom line but opened them up for a run, which often resulted in their failure. The Fed was put in place, ostensibly to prevent such runs and to secure peoples deposits. What they did was to establish a fractional reserve system where banks are now permitted to lend out 90% or more of their reserves. This of course made for a very profitable situation for bankers. Later, the FDIC was put in place to assuage the fear of bank failure and eventually the requirement of gold and silver backing was entirely removed. Amazing how gullible the American people were and still are, isn’t it?
Until recently, with a few hiccups along the way, this worked reasonably well, at least for the bankers. Bank runs became relatively rare events. With the advent of computers and computer networks that facilitated inter-bank transfers, it became possible to avoid runs via overnight inter-bank lending. Banks that were hit by heavy withdrawals could borrow from banks that had more deposits and thereby maintain their required reserve level. Since moneys withdrawn from one bank usually ended up being deposited in another bank, this system worked reasonably well. That is, it did until last month when inter-bank lending rates rose to astronomical levels and lending virtually came to a halt. Why? because the banks didn’t trust each other. They didn’t know whether this bank that needed a loan would still be there or would be bankrupt the next day.
Since 1913 our economy has become international and extremely complex. The division of labor is now so highly specialized that any disruption in the availability of reliable money could easily lead to a major disaster. Consider what would happen if trucks stopped delivering food or gasoline or other necessities for even a few weeks. Our economy cannot be sustained if banks can’t balance their accounts each day. This is what Paulson and Bernanke are so very concerned about and why they went to Congress begging for money. Even so, from the structure of the bill and how they propose to use the money, it appears they will not solve the problem and many more bailouts will be needed. For the gory details, see "Financial and Corporate System is in Cardiac Arrest: The Risk of the Mother of All Bank Runs," Nouriel Roubini | Oct 3, 2008.
1913 was a very bad year for America. It saw the initiation of the intrusive federal income tax, the Federal Reserve, which put the fox in charge of the chicken coop and the direct election of senators, the final straw that broke the back of the power of the States in Washington. This year, this month, we are witnessing the death knell of the Republic, which, having degenerated into a democracy, is now in reality a socialistic oligarchy.
What became of the Land of the Free and the Home of the Brave? Why are we now at the mercy of greedy bankers and corrupt congressmen? Where along the way did we go wrong? The income tax was sold to the American people as a boon to the average man. They were told it would be a very small percentage and only the rich would have to pay anything at all. It was an appeal to the larceny in the hearts of the common people. They voted for the income tax to get something for nothing at the expense of the rich. Why are almost all our representatives the most self-serving, avaricious liars that can be found anywhere? It is because those are the kind of individuals that rise to positions of leadership in a society where families teach their children that they need to look out for number one, that they need to step on whoever gets in their way on the road to success. The problem with America lies in the families of America. We cannot expect justice and honor in our elected officials when justice and honor are not present in our homes.
Alexis de Tocqueville, a Frenchman who came to America in the 1830’s said, "America is great because America is good but when it ceases to be good, it will cease to be great." The truth of these words is very much in evidence both in Washington and on Main Street today. These early Americans that made America great were God-fearing men and women who taught their children that God’s law stood above the civil law. They did what was right because it was right before God regardless of what the civil law did or did not require. Toqueville was amazed at how little government was in evidence in this country compared to France. In France, people obeyed the law because of the threat of the bayonet and police were everywhere. Americans were free of the coercive presence of government because they did what was right from their hearts. God’s law operating in their hearts made them free from the tyranny of totalitarian government. Indeed, where God’s law is respected and obeyed, we find the greatest degree of freedom possible to sinful man. "Blessed is the nation whose God is the LORD" (Psalm 33:12).
Our nation has gone astray because we have left God’s law behind. We, following Darwin and the atheists among us, have decided we didn’t need God or God’s law. We thought we could make our own laws, deciding for ourselves what was good and what was evil, what was right and what was wrong. We have relegated God’s word to personal salvation and heavenly things and are now beginning to suffer the consequences of living under man’s law. The road, indeed the only road, to recovery is to return to God’s law and to make that law operative in our lives. .
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The views expressed in this
article are those of Lou Poumakis only and do not represent
the views of Nolan Chart, LLC or its affiliates. Lou Poumakis is
solely responsible for the contents of this article and is not an
employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
I guess I just don't get it ~ what is "God's Law"? Did God happen to say something about the Federal Reserve and the Bailout that I missed?
I think you're just upset about the Bailout and you're trying to make it sound like God's involved. I don't think he cares at all. He just wants you to get right with his Word. Let the other sinners do their own thing.
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