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Is the Bailout Plan Breeding a Greater Crisis?

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At his March 24 press conference President Obama demonstrated that he is capable of understanding issues as presented to him by his advisers and able to pass on the explanations to the press. The question is whether Obama’s advisers understand the issues.

Obama’s advisers are focused on rescuing banks and the insurance company, AIG. They perceive the problems as solvency and paralyzing uncertainly or fear. Financial institutions, unsure of their own and other institutions solvency, hoard cash and refuse to lend. Credit is needed to get the economy moving, and the Federal Reserve and Treasury are doing their best to inject liquidity and to remove troubled assets from the banks’ books.

This perception of the problem and the “remedies” being applied, might be causing a greater problem for which there is no solution. Obama’s approach, and that of the previous administration, requires massive monetization of debt by the Federal Reserve and massive new debt issues by the Treasury.

The unaddressed question remains: Is the US dollar’s status as world reserve currency threatened by the massive debt monetization and multi-year, multi-trillion dollar issuance of new Treasuries?

The United States has become an import-dependent country. The US is dependent on imports for energy, manufactured goods including clothes and shoes, and advanced technology products. If the US dollar loses its reserve currency status, the US will not be able to pay for its imports. The ensuing crisis would dwarf the current one.

Obama’s advisers believe that the US can monetize debt and issue new debt endlessly, because America’s capital markets are the deepest and most liquid. The dollar is strong, Obama said at his press conference.


But already cracks and strains are appearing. The day after Obama’s press conference, an auction of UK bonds, known as gilts, failed when bids fell short of the supply offered and interest rates rose. This is a bad sign for Prime Minister Gordon Brown’s plan to market an unprecedented amount of new debt during the current fiscal year.

It is also a bad sign for Obama’s similar plan. In the US, interest rates on US Treasuries have risen in anticipation of unprecedented new Treasury issues despite the Federal Reserve’s recent announcement that it intends to purchase $300 billion of existing Treasuries held by the banking system.
Normally, Fed purchases raise bond prices, thereby lowering interest rates. However, the inflation and interest rate implications of the unprecedented supply of new Treasuries necessary to finance the multi-year, multi-trillion dollar budget deficits are beginning to be recognized in bond and currency markets. Everyone knows that the Federal Reserve will monetize the new debt issues rather than allow a Treasury auction to fail. Recently, America’s largest creditor, China, expressed concern that the value of its massive holdings of US dollar investments is in danger of being inflated away.

The Fed cannot monetize new Treasury issues without the word getting out. If and when this happens, the US dollar’s exchange value is likely to drop while interest rates and inflation rise.

To avoid a crisis of this magnitude, the US needs to focus on saving the dollar as reserve currency. As I previously emphasized, this requires reducing US budget and trade deficits.

Despite the near-term budget costs of ending the occupation of Iraq and the war in Afghanistan, terminating these pointless military adventures would produce immediate large out-year budget savings. Closing many foreign military bases and cutting a gratuitously large military budget would produce more out-year savings. The Obama administration’s belief that it can continue with Bush’s wars of aggression while it engages in a massive economic bailout indicates a lack of seriousness about America’s predicament.

Rome eventually understood that its imperial frontiers exceeded its resources and pulled back. This realization has yet to dawn on Washington.

More budget savings could come from a different approach to the financial crisis. The entire question of bailing out private financial institutions needs rethinking. The probability is that the bailouts are not over. The commercial real estate defaults are yet to present themselves.

Would it be cheaper for government to buy the shares of the banks and AIG at the current low prices than to pour trillions of taxpayers’ dollars into them in an effort to drive up private share prices with public money? The Bush/Paulson bailout plan of approximately $800 billion has been followed a few months later by the Obama/Geithner stimulus-bailout plan of another approximately $800 billion. Together it adds to $1.6 trillion in new Treasury debt, much of which might have to be monetized.

Could this massive debt issue be avoided if the government took over the banks and netted out the losses between the constituent parts? A staid socialized financial sector run by civil servants is preferable to the gambling casino of greed-driven, innovative, unregulated capitalism operated by banksters who have caused crisis throughout the world.

Perhaps the Federal Reserve should be socialized as well. The notion of an independent, privately-owned Federal Reserve system was never more than a ruse to get a national bank into place. Once the central bank is part of the state-owned banking system, the government can create money without having to accumulate a massive public debt that saddles taxpayers’ and future budgets with hundreds of billions of dollars in annual interest payments.

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http://www.paulcraigroberts.org/

Dr. Roberts was Assistant Secretary of the US Treasury for Economic Policy in the Reagan Administration. He was associate editor and columnist with the Wall Street Journal, columnist for Business Week and the Scripps Howard News Service. He is a contributing editor to Gerald Celente's Trends Journal. He has had numerous university appointments. His book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West is available here. His latest book,  How America Was Lost, has just been released and can be ordered here.

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Of course they know it's a gigantic swindle. T... by Roger Thomas on Thursday, Mar 26, 2009 at 8:09:29 AM
Here's what Dr. Roberts said:"Financial institutio... by Rady Ananda on Thursday, Mar 26, 2009 at 8:54:16 AM
Rady asks: "I guess I can sum up my questions... by Tom Cobb on Thursday, Mar 26, 2009 at 11:52:37 PM
I'm right with you in diffusing the concentration ... by Rady Ananda on Saturday, Mar 28, 2009 at 12:19:06 AM
There are many forms of capitalism.  What we ... by Scott Baker on Thursday, Mar 26, 2009 at 9:21:16 AM
Thank you, Scott. I just read Ellen Brown's de... by Rady Ananda on Thursday, Mar 26, 2009 at 7:49:46 PM
The big banks have been bailed out ENOUGH. If the... by Syndi Yellowbird on Thursday, Mar 26, 2009 at 11:29:58 AM
The establishment hasn't a clue how to get out of ... by Jason Paz on Thursday, Mar 26, 2009 at 12:31:54 PM
How can you say that Obama understands the real is... by James Raider on Thursday, Mar 26, 2009 at 1:16:12 PM
Obama recently referred to P/E as profit/earnings.... by Gigi3 on Thursday, Mar 26, 2009 at 7:54:11 PM
Rome, according to my reading the flounders of you... by shadow dancer on Thursday, Mar 26, 2009 at 2:52:19 PM
and torture and wars and environmental degradation... by Rady Ananda on Thursday, Mar 26, 2009 at 5:12:16 PM
(NYPost)“As Treasury Secretary Tim Geithner ... by gordon nelson on Thursday, Mar 26, 2009 at 3:00:15 PM
After 66 days Obama has had plenty of time to re-r... by Jason Paz on Thursday, Mar 26, 2009 at 5:50:46 PM
Mr. Roberts -- you are a former Asst. Secretary of... by boomerang on Thursday, Mar 26, 2009 at 5:58:13 PM
I am glad you wrote an honest objective assessment... by Simple Truth on Thursday, Mar 26, 2009 at 8:15:29 PM
The seminal, and really important, debate is n... by Alan MacDonald on Thursday, Mar 26, 2009 at 10:23:26 PM
      Boomerang asks a go... by mary sunshine on Friday, Mar 27, 2009 at 1:22:18 AM