prospects of a government rescue for the foundering
American automakers dwindled Thursday as Democratic
Congressional leaders conceded that they would face
potentially insurmountable Republican opposition,"
NY Times last Friday. [Chances
Dwindle On Bailout Plan For Automakers, By
David M. Herszenhorn,
Wow! The entire country is
steamed up over the Republicans bailing out a bunch
financial crooks who have paid themselves
fortunes in bonuses for destroying
GM`s divisions in
Conservative talking heads are saying GM is a "failed business model" unworthy of a $25 billion bailout. These are the same talking heads who favored pouring $700 billion into a failed financial model.
The head of the FDIC is trying to get $25 billion—a measly 3.5 percent of the $700 billion for the banksters—with which to refinance the mortgages of 2 million of the banksters` victims, and Bush`s Secretary of the Treasury Paulson says no. Why aren`t the Democrats all over this, too?
Apparently, the Democrats still think they are the minority party—or else their aim is to supplant the Republicans as the party of the rich.
Any bailout has its downsides.
America loses its auto industry, it will lose
the suppliers as well and will cease to have a
manufacturing sector. For years no-think economists
have been writing off
A country that doesn`t make anything doesn`t need a financial sector as there is nothing to finance.
The financial crisis has had
one good effect. It has cured Democratic economists
like Robert Reich and Paul Krugman of their fear of
During the Reagan years these two economists saw
doom in the "Reagan
deficits" despite the fact that OECD data
showed that the
Today Reich and Krugman are unfazed by their recommendations of budget deficits that are many multiples of Reagan`s. Moreover, neither economist has given the slightest thought as to how the massive budget deficit that they recommend can be financed.
Both recommend large public spending programs. Krugman puts a price tag of $600 billion on his program. If it takes $700 billion to save the banks and only $600 billion to save the economy, it sounds like a good deal. But this $600 billion is on top of the $700 billion for the banks, the $200 billion for Fannie Mae and Freddie Mac, and the $85 billion for AIG. These figures add to one trillion five hundred eighty-five billion dollars, a sum that must be added to the budget deficit due to war and recession (or worse).
What we are talking about here
is a minimum budget deficit of $2 trillion. The
The US Treasury doesn`t have any money, and neither do Americans, who have lost up to half of their savings and retirement funds and are up to their eyeballs in mortgage and consumer debt. And unemployment is rising.
There are only two sources of financing: foreign creditors and the printing press.
I doubt that foreigners have $2
trillion to lend to the
Economists and policy-makers are not thinking. This enormous financing need comes not to a well-managed economy that can take the additional debt in its stride. Instead, it comes to an economy so badly managed that there are no reserves.
Generally, when countries acquire more debt than they can service, they inflate away the debt. If foreign creditors do not save the Obama administration, the Treasury will print bonds and give them to the Federal Reserve, which will issue money.
The inflation will be severe,
particularly as Americans will not be able to pay
for the imports of manufactured goods from abroad on
which they have become dependent. The exchange value
of the dollar will decline with the domestic
inflation. Once inflation is off and running, the
printing press dollars will only have goods made in
Paulson should rethink the automakers` and FDIC`s proposals. A bank produces nothing but paper. Automakers produce real things that can be sold. Occupied homes are worth more than empty ones.
Paulson`s inability to see this is the logical outcome of Wall Street thinking that highly values deals made over pieces of paper at the expense of the real economy.
Paul Craig Roberts [email him] was Assistant Secretary of the Treasury during President Reagan`s first term. He was Associate Editor of the Wall Street Journal. He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University. He was awarded the Legion of Honor by French President Francois Mitterrand. He is the author of Supply-Side Revolution : An Insider`s Account of Policymaking in Washington; Alienation and the Soviet Economy and Meltdown: Inside the Soviet Economy, and is the co-author with Lawrence M. Stratton of The Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of Justice. Click here for Peter Brimelow`s Forbes Magazine interview with Roberts about the recent epidemic of prosecutorial misconduct.