Bailout economics 101Dennis Kucinch, who voted against the bailout, has a remarkable basic lesson on how the bailout would have worked. In a letter to his supporters, he writes:
Here is a very quick explanation of the $700 billion bailout within the context of the mechanics of our monetary and banking system:The taxpayers loan money to the banks. But the taxpayers do not have the money. So we have to borrow it from the banks to give it back to the banks. But the banks do not have the money to loan to the government. So they create it into existence (through a mechanism called fractional reserve) and then loan it to us, at interest, so we can then give it back to them.
Confused?
This is the system. This is the standard mechanism used to expand the money supply on a daily basis not a special one designed only for the "$700 billion" transaction. People will explain this to you in many different ways, but this is what it comes down to.
The banks needed Congress' approval. Of course in this topsy turvy world, it is the banks which set the terms of the money they are borrowing from the taxpayers. And what do we get for this transaction? Long term debt enslavement of our country. We get to pay back to the banks trillions of dollars ($700 billion with compounded interest) and the banks give us their bad debt which they cull from everywhere in the world.
Who could turn down a deal like this? I did.
Actually, Kucinich is pretty close. The point he misses is that much of the money won't be borrowed from banks but from other countries, primarily China, that have a surplus of cash and want to invest in the U.S. But the sentiment is right.
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Comments (5)
I think that the proper conjugation was "had wanted to" (past perfect?) rather than present ("want").
If Pelosi can borrow to give Wall Street $700b, then why can't she find San Francisco $20b so that we can tunnel down and build proper subways?
What does it mean that Pelosi and the Democratic leadership and candidate sucked up to a politically invalid Bush in a way that even the Republicans wouldn't?
The Democrat leadership is behind the curve and the 8 ball with respect to the people. When is Obama going to take a risk and offer up some leadership that makes a difference?
-marc
Posted by marc salomon | September 30, 2008 03:32 PM
Will due charity to Ms Pelosi (whom I have never liked, since she arrived in SF almost 40 years ago), I suspect that she and other senior Dems were subtly informed by Dubya's gang that serious opposition could be life-threatening. "Don't f*ck with us or you'll get Wellstoned," the self-destructing message probably read. I can only hope that Ms Pelosi et al act as they due out of justifiable fear, not just because they're wimps and whores and sellouts.
Posted by ric carter | September 30, 2008 07:09 PM
Actually, Dennis Kucinich has it basically right. -
The $700 billion dollar 'Get Out Of The Economic Crisis Free Card' that Wall Street is seeking from the Congress, would falsely reset the system so that that the big banks can just go right back in again to foolishly conjure up trillions more dollars out of thin air, by creating new debt in a re-inflated runaway credit market.
(Creating new debt that borrowers will pay back with interest is how new money comes into being. People and businesses take out new loans from the banks, and since the new loans are expected to be paid back with interest, the banks are allowed to show new money on their books immediately, which they can then spend on new investments.)
Dennis' point is that it will be the average Joe and Jane who will assume almost all of that new debt; meaning that Americans will be driven even deeper into debt than the already are. Then when we hit another rocky spot, that debt will be even more seriously unmanageable than the current collapsing debt bubble. (At which time Wall Street will seek yet more hundreds of billions in bail out dollars with which to re-prime the global capitalist pump, in order to drain us, and the world, of our already drastically strained productivity and resources, by using debt creation to create yet more money out of thin air. This new money will then be used to further leverage that global productivity and natural resources. This whole mess (which depends on new and constantly expanding debt to keep the system endlessly growing instead of collapsing) is why the planet is being mined, developed, and farmed to oblivion, and why workers' wages (in comparison to executive salaries and stock and bond returns) are tail-spinning in to a black hole.
To hear an audio covering the basics of how money is actual created in the real world of the global neo-capitalist system go to http://www.antiscia.com/wizardsofmoney/ and click on the first link 'How Money Is Created'.
Posted by Eric Brooks | October 1, 2008 02:09 AM
Money was created when people made things and sold them at a profit. Money has been created by the FIRE economy:
http://www.michael-hudson.com/articles/debt/Hudson,RoadToSerfdom.pdf
As inflation has been plowed into housing prices, money has been taken off the top by the FIRE economy in the form of interest and insurance payments.
Now that the FIRE economy can no longer sustain artificially high house prices, this is all crashing down.
Maybe we'll all have to make real things that real people want and need and sell them at a profit again and see real estate values fall to correspond to wage levels.
Who'd have thunk?
-marc
Posted by marc salomon | October 1, 2008 10:59 AM
In thinking further on this, it seems that the reason why Pelosi and crowd are willing to allow foreign banks to offload their toxic mortgage obligations onto the US taxpayer is as a sweetener, encouraging foreign governments to buy up the bond debt that will be floated to fund this bailout.
-marc
Posted by marc salomon | October 2, 2008 08:42 AM