Indispensable Economics Government Bail Outs and What's Really Happening

Sep 18, 2008

There is a big panic about the recent failures of Lehman Brothers, the bail out of Freddie Mac and Fannie Mae, and lastly about the bail out of AIG. 

I find that very few people in the media have the first clue as to what is going on (not to mention politicians and the ordinary people).  One pundit, who I have criticized in past writings, was almost in tears because the government did not foresee the crisis coming and protect us from it.  But it was that very government, in the persona of the Federal Reserve Bank, that brought on the crisis in the first place, by its never-ending creation of money and credit. 

When the Fed creates credit out of nothing, which banks suck up like there is no tomorrow, it gives banks more money to lend out and make a profit without any additional saving.  This drives interest rates down, and also reduces credit requirements.  If the banks do not reduce the requirements for getting a loan, they will not be able to lend out all the extra money, and money sitting on the books is not earning interest from borrowers.  So, loans are granted to folks who might not be able to pay them back.

Now the Federal Reserve has come up with $85 billion to lend to AIG, obviously created out of nothing as usual, in return for an 80% equity stake in the company.  This means that the Fed is now the owner of AIG.  I remember that the very definition of socialism was that the government owns the means of production.  Gee!

Now comes “moral hazard.”  In economics, moral hazard occurs when one tries to prevent something in a way that actually encourages the very behavior one wants to discourage.  Normally, banks which make a lot of bad loans will go out of business when people begin to default on those loans.  The possibility of widespread non-payment is an incentive not to make those loans.  But if someone, like the government for instance, promises or even demonstrates, that it will save a company if the ill-considered loans fail, the company now has an incentive to continue to take the risk of making bad loans.  Government bail outs will only encourage the situation.

Lastly, the pouring of vast amounts of money into the economy by the credit creation of the Fed to bail out the companies will further reduce your purchasing power by watering down the value of the dollar more than it has been.

It should be pointed out that neither presidential candidate is saying anything like this. 

Why do so many people think that the president is our savior?  The president does not have the power to control this because the Federal Reserve operates independently of the elected officials.  I am not recommending that the elected officials control the Fed.  I think we have enough evidence that they would not be able or willing to do this—remember our national debt plus unfunded mandates to the tune of $55 trillion?  The only solution is to get rid of the Federal Reserve Bank!