We Should Have Called Their Bluff!

This article is from a new Political Grind author - Dr. Frederick J. Oerther III is a professor of economics at Greensboro College in Greensboro N.C. Please wish him a warm welcome. I’m sure you will enjoy this great article. Note: this editorial was written before the House vote last Friday.  It is presented in its original form.

This Wall Street bailout is a huge scam – a blackmail operation by Wall Street against Main Street.  Here is the threat: either cash or crash (bailout or bust).   Fellow Americans: CALL THEIR BLUFF!

This scam began on September 18, 2007, when – under the threat of falling equity prices, the Federal Reserve reversed field and lowered the Federal Funds rate by ½ point; since then the Fed has lowered the Funds rate 6 more times, so that it now is only 2.00%.  The highlight of this Easy Money policy was the impromptu January 22, 2008 reduction by ¾ point out of the blue – what happened?  The stock market indices went up for a few days and then began their current plunge.  The reality is that every time the government throws more liquidity into the system, equity prices actually decline.  Why?  Because equity prices reflect the prediction of future economic conditions, and investors sense, correctly, that these bailouts are setting the stage for dramatic inflation, overwhelming taxes, and a return to a 1930 macroeconomic depression.  The bailout is not saving the stock market, it is causing the downturn to become worse.  And every time the government intervenes in equity markets, it causes investors to hang back in hopes of even bigger bailouts to follow.

The U.S. Congress is supposed to represent the people, all the people, not just the fat cats!  The Congress has no natural right to load future Americans with the crushing tax (and/or inflation) burden represented by this corporate welfare con game.  Bernanke is a simpleton; Paulson is an empire-building shark; Bush is a coward. Don’t let the elected government of the United States get high-jacked by investment bankers and Ivy League con men peddling panic and paranoia and discredited 1950s Keynesian economics.  Call their bluff!  The market will dip, and then it will have to clean house – Main Street will not be damaged in the long-run just because fly-by-night realtors and commercial paper swindlers lose their shirts.  In fact, as taxpayers and consumers and workers we will be much better off.  Let Wall Street take its medicine.  There is no crisis on Main Street.  SAY NO TO THE BAILOUT.

And a word of warning to our Honorable representatives . . . this time the public is not fooled.  If you vote this bailout – if you let these bankers enrich themselves at public expense – if you level this burden of taxes and inflation on the economic future of America – there will be no place to hide in 2010 or 2012.  There will be no rationalization that will fly – no set of excuses the public will accept – no arrogation of motives for the “public good” – that will prevent taxpayers and voters all over the country from rising against you.  There will be no political rock you can crawl under that will save you from the voter backlash which will follow this bailout like a tidal wave.  Every incumbent who votes for this bailout will be subject to the most ruthless scrutiny – financial, personal, and political – that ever overtook the District of Columbia – until every one of you is discredited and thrown out of office.  Perhaps the public has been tricked by the siren song of political expediency before –

–    we believe in market economics, but . . .
–    we don’t want to create inflation, but . . .
–    we want a balanced budget, but . . .
–    we don’t want to give the executive powers, but . . .
–    we don’t want to pour good money after bad down this rat-hole, but . . .

however, this time you will go too far – this time the “necessity” is so obviously phony, that your lack of principles (and concern for the common American, who, by the way, doesn’t have multimillion dollar portfolio and therefore could care less what happens to corporate execs and foreign investors) is going to cost you.

This bailout is not just a bad idea – it will produce an economic disaster of the first magnitude – it will be 1930 all over again – and there will be nobody to blame but the House and Senate.  Perhaps your motives are pure, but if you vote this bailout, your intelligence is suspect.  Before it is too late – put the brakes on this bailout and serve notice to Wall Street – the taxpayer will not be had.  Call Congress now – there is no crisis – NO BAILOUT!!!!!!  NOT A DIME FOR WALL STREET.

America, do not take your economics from Pelosi and Frank.  Nancy Pelosi [8.CAL, 1987] has no background in business or economics.  Her father mayored the city of Baltimore into financial decline in the 1950s and her brother contributed to its bankruptcy in the 1960s, so, certainly the hubris of failed government management is her legacy.  Her entire background is in partisan politics and Democratic Party “public relations” – which probably does qualify her to advocate for the largest single act of favoritism-driven pork and full-scale under-the-table payola ever to be considered by the U.S. Congress.  Barney Frank [4.MASS, 1980] is uniquely unqualified to be the Chair of the House Financial Services Committee.  He has never owned or managed a business, he has never produced a product, and knows nothing about economics or fiscal management.  While Mr. Frank may. or may not, be qualified to attend to a public restroom, he knows nothing about prices, profits, production or private property rights.  He has learned to practice class warfare and to mouth Keynesian platitudes from the 1950s.  A greater anti-genius and political hack could not have been found to perpetrate this unprecedented corruption on the American taxpayer and consumer.  Indeed, compared to these two and their new-found ally George W. Bush, Herbert Hoover was a financial wizard.  A little market economics for our leaders?

The bailout will not “rescue” Wall Street, but will itself create a dramatic crash of equity markets.  The indexes of stock market equities have fluctuated wildly since the Congress began this bailout fiasco; in addition to the normal turbulence of business uncertainty, Pelosi and Frank have contributed an environmental shock of potential government intervention which has caused Wall Street and Main Street to halt normal economic life.  Bailout – no bailout, how big, what conditions, which regulations, etc.; all these political uncertainties have disrupted domestic and overseas capital markets and sent the indexes tumbling.  Is it because there is not enough financial regulation in the world?, No, it is because American taxpayers and consumers correctly perceive that this bailout will result in substantial increases in income taxes and sales taxes, and in inflation rates in double digits.  This current bailout – and of course there will be more and larger to follow, when this one ends in disaster – is rapidly returning the U.S. to 1979 economic conditions.

Government is not the cure for the downturn, government is its cause.  On September 18, the Fed’s Open Market Committee “voted” to reduce the Federal Funds rate; since then the FOMC has cut rates six more times, so that by the end of spring 2008, the nation was awash in liquidity.  The downturn in equity values is directly related to this Easy Money policy since investors anticipate the declining real values of investment in the face of rising inflation, which will easily top 6% for 2008.  The problem is not liquidity, the problem is uncertainty – investors will not deliver their real capital wealth over for loan until the real estate mortgage market is purged and the banks corroborate their balance sheets – which is precisely what cannot happen if the Treasury is going to start buying up all the unprofitable commercial paper in circulation.  The bailout is pouring gasoline on the fire and blocking the actions that need to take place to correct for the previous mal-investment in real estate.

In calm economic times, a greater money supply would lower interest rates, but do not be surprised when this massive infusion of funny money drives mortgage interest rates towards 20% as in the late 1970s.  Why? because the bailout is just inflation on the hoof, from which investors will flee.  The government’s intervention – and its stated policy of picking loser paper for bailout – will create a true capital shortage, similar to the “capital strike” of 1935, and interest rates will soar.  Then investment spending will halt, layoffs will rise, and household income will decline – not because of Wall Street, but because of Washington, D.C. – say hello to 1930.

The Federal government of the U.S. is already the worst run enterprise in the world.  It consistently loses hundreds of billion dollars a year, to the point where we are now more than $9 trillion in debt, a figure in excess of $30,000 for every man, woman, and child in the U.S.  In percentage terms the indebtedness of the government is approaching 75% of GDP, but of course, if the economy turns down in 2009, then the debt as percentage of GDP will approach 100% or more, comparable with the heights of World War Two.  Even these figures are unreliable, since figures reported from the Office of Management and Budget and in the Economic Report of the President have proven to be wildly inaccurate – understating actual expenditures and overestimating revenues – year after year.  The government consistently refuses to report “emergency expenditures” and covers the true size of its deficits by spending Social Security “Trust Fund” revenues from the FICA payroll tax.  The accounting practices at the Treasury are as suspect as any used in investment banking.  Secretary Paulson makes the guys at ENRON look like Boy Scouts.

What investor would look upon the U.S. as a good bargain?  And now, the Congress proposes to allow the Treasury to purchase – at what can only be called bloated prices – vast amounts of mortgaged-backed commercial paper which has an excellent chance of realizing ultimate values of a few pennies on the dollar.

To the Honorable members of Congress, let them understand this – they may not “get economics” but Main Street does.  The average citizen knows how to make ends meet, is careful with his cash flow, and doesn’t go in for fly-by-night “investment” such as your bailout.  We can’t just print more money when we mess up and we don’t blame our failures on capitalism or Wall Street.  So, you go ahead and try to run your little game – bailing out your banker friends at the cost of the worker and small business owner.  We know who you are, and we are going to keep track of how you vote; and when this bailout crashes the macroeconomy back into the 1970s, the citizen/taxpayer will clean the stables.  And I can guarantee that some new President – who is elected to clean up the mess that you and Bush and Pelosi have made – will be happy to put every one of you up for a thorough IRS investigation – for you see, we know why most of you are for this bailout, and it doesn’t have anything to do with “saving the economy.”

The American public, which is overwhelmingly against this bailout, knows that letting the Treasury run wild will not save the economy, it will destroy it.  It is the politico-media which have invented this “crisis,” but the public is a hundred times more worried about what these know-nothings and Keynesian economic “experts” in Washington will do to the fiscal position of the government than it is about short-run fluctuations in Wall Street equity prices.  So calm down, think clearly, protect the taxpayers (for once) and reject this bailout idea.

Dr. Frederick J. Oerther III is a Professor of Economics, Business Division, at Greensboro College, in Greensboro NC.

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