Would You Invest Your Money Into a Bailout?
The government is apparently thinking about allowing wealthy individuals to invest money into a bailout. If you're wondering what this means, you are not alone. Let's take a look.
U.S. to invite wealthy to invest in bailout: report
WASHINGTON (Reuters) - The U.S. government plans to invite wealthy investors to invest in the bailout of the crippled financial system, The Washington Post reported on Friday.
The investors would be invited to buy up recently issued, highly rated securities that finance consumer lending -- without the risk of massive losses, the report said.
The idea is to entice the investors to put their huge cash piles to work to stimulate the financial system, the Post said.
The program, which could involve the government lending nearly $1 trillion to these investors, exceeds the size of every other federal effort to address the financial crisis so far, the newspaper said.
The initiative adopts an approach that could be the model for future federal efforts to aid the credit markets, sources familiar with government planning were quoted as saying.
First of all, why do wealthy investors need to be invited to invest in the "bailout." If a wealthy investor decides they want to invest in a business, loan money to a startup, create new jobs, purchase more goods, or anything else with their money...this is essentially them deciding to invest in a "bailout." However they decide to use their capital is, in fact, an investment, and it is an investment in the economy.
If they keep their money in banks, they are investing their confidence in that bank, while also making their capital available for loans (albeit too available, thanks to fractional reserve lending). If they spend their money buying goods, they are helping to create jobs (or keep existing jobs alive). If they spend their capital starting a business, they are directly helping to create jobs.
Clearly, whatever they do with their money in the U.S, they are making decisions which in aggregate will affect the economy and help direct it to where it needs to be. Why does the government need to get involved in this process?
Well, the answer seems clear:
The program, which could involve the government lending nearly $1 trillion to these investors, exceeds the size of every other federal effort to address the financial crisis so far, the newspaper said.
I find it incredibly interesting that the government wants to invite wealthy people to invest in a bailout, and somehow this is going to cost taxpayers up to $1 trillion dollars. The government doesn't seem to want investors to actually invest the capital they have, and to make decisions based on the effects it will have on their own capital and belongings.
No, the government wants to use wealthy investors as a way of piping more taxpayer dollars into the economy so that credit can be extended to those overburdened with too much credit.
Wealthy investors won't be footing the losses here, it seems, but your average taxpayer, overburdened with too much debt already, will be incurring these losses, as well as the losses from the 3.6 trillion dollar deficit.
Who's going to come out ahead here?
Is Debt the Lifeblood of the Economy?
Let's hope not. Mish posted a great article recently discussing the phrase that has been tossed around a lot lately: "credit is the lifeblood of the economy." Of course, the flip-side of credi, as Mish points out, is debt, and we should hope that debt is not the lifeblood of the economy.
Is Debt the Lifeblood of the Economy?
Like Kevin, I had to laugh the first I heard “Credit is the Lifeblood of the Economy”. After it was repeated 20 times then espoused by Congress, the Treasury, and the Fed, and indeed even President Obama, it became more scary than funny.This is why:
The flip side of credit is debt. Is debt the lifeblood of the economy?Surely not! It’s not that debt is bad in and of itself. Debt is fine as long as it is going to productive uses or as long as the lending is backed up by savings somewhere. No one can argue that savings should not be lent.
However, the problem is that credit has been extended without savings backing it up to those who had no possible means of paying it back, with leverage, and with “no money down”.
Were it not for fractional reserve lending, this could never have occurred.
I think Mish knows the cause of the problem, and it seems many other people do as well. Somehow, however, these people never make it into the government. Fractional reserve lending is essentially at the heart of any "credit crisis" because it allows money to be lent from nothing, rather than from savings.
Banks leveraged up to the hilt on this principle so that their executives could make boat loads of money before the bottom fell out. That is just what they did.
Clearly debt is not the lifeblood of the economy. By extension, credit is not the lifeblood of the economy either. Rather it is savings that is the lifeblood of the economy, because without adequate savings, extending credit is nothing but a pyramid scheme that eventually implodes, which is of course what happened.
Amazingly, the “solution” in Congress is to encourage more reckless lending even though there is no savings to lend. This Ponzi financing scheme can’t possibly work, which by definition means it won’t.
Ah yes, congress trying to solve the problem with more of the same. I think everyone must realize that we need more real savings in America (and the world), but for some reason, Obama and his crew think that we need more debt and more deficit -- incredible. I have talked about this countless times before, and Mish really does a great job hitting this point home. We seem to be doing everything wrong.
Mish goes on to discuss the problems with pretty much all of the current solutions that involve suspending mark to market accounting, and why they will not work, and why they simply skirt around the real problems.
As always, readers should check out the entire article by Mish -- they are always worth the read.
Poor Logic Infects China
Poor economic logic and policy decisions seem to be spreading around the world. It seems almost no nation is absent of poor economic logic leading to poor economic policy decisions, and China is no exception.
Leader says China will spend more to grow
Investors were cautiously cheered by the first signs that a massive $585 billion stimulus program was spurring economic rejuvenation. A key purchasing managers index rose for the third-consecutive month. And there were hints that Premier Wen Jiabao might even announce a second stimulus package at this week's annual meeting of the National People's Congress, China's rubber-stamp legislature.
Why are people so fixated with the idea that massive government spending can "spur economic rejuvenation?"
As it happened, Wen on Thursday disappointed hopes of a new round of pump-priming. But in a nationally televised address, the Chinese premier vowed to do whatever is needed for China to grow at an annual rate of 8% this year. "We will significantly increase government spending," he told the opening session of China's top legislature, the National People's Congress (NPC).
Western investment banks expect China's economy, which was growing at a nearly 12% annual rate in mid-2008, to struggle to hit Wen's goal. Growth slowed to an annual pace of 6.8% in the final three months of last year. But analysts say the government is far from running out of weapons to fight the global downturn.
Expecting 8% annual growth for China may be a little unrealiztic for 2009, but we shall see what happens. One thing to note is that this government spending has to stop at some point. They can't just keep ramping up spending forever. When the government spending stops, the party will end, and it has to end.
The Chinese can try to spend and spend and blow a bigger bubble much like our Central Bank has in the U.S., but eventually things have to come back down, and when it does, it will only be worse. China is making things worse in the long run rather than better, and yet investors are applauding them.
Great job China, join everyone else in the quest for silly stimulus packages, and insane economic policies.