Thursday, June 2, 2011

Too Big To Fail: What A Joke!

I can’t be the only one growing tired of the constant barrage of the use of the word “crisis” by elected officials and the media, especially when it comes to issues regarding our economy and future prosperity. Let’s consider what “We The People” have been through, and been told, over the last three years.

George W. Bush came to us first during the financial “crisis” and told us that the banking system in the United States was on the verge of collapse. His advisors, and talking heads on television, began to tell us that if we didn’t cough up a lot of cash, then the system would collapse and we would enter into a second Great Depression. Because of all the bad loans on the books, and financial companies leveraging their assets to ridiculous levels (mostly due to subprime mortgages), and terrible business practices the term, “too big to fail” was introduced into our daily lives. We were told that if companies that had taken on too much risk were allowed to fail our economy would collapse as the media painted pictures of Depression-era bread lines.

So then President Bush and his advisors told us that we would have to pay for a program called TARP (Troubled Asset Relief Program) to the tune of about $700 billion, you know…to bail out those companies that are inefficient and make bad decisions. In 2008 the good folks on Main Street that pay taxes were already hard pressed with a slowing economy, and now this hit the fan. GM and Chrysler were also collapsing because of bad decisions by management regardless of how many cars they sold. AIG was on the verge of going under and two of Wall Street’s legendary firms, Bear Stearns and Lehman Brothers, were the first two to officially close their doors. That was enough to scare Wall Street, Washington, and many investors. The stock market collapsed about 50% from the fall of 2007.

We were told that the taxpayer would probably make money from the massive bailouts over time as the economy recovered and the “toxic” assets on bank and corporate balance sheets were sold. And the government may have recouped a big portion already, but I don’t see an equivalent amount of tax cuts going to Americans. The same tax structure was voted on to be kept in place. However, Neil Barofsky, Special Inspector General for the TARP fund went on record to say, “Inadequate oversight and insufficient information about what companies are doing with the money leaves the program open to fraud, including conflicts of interest facing fund managers, collusion between participants and vulnerabilities to money laundering.” All of a sudden I didn’t feel so confident that the American people would ever know the truth about whether they lost money or made money. Even if they made money, I don’t see Washington willing to cut taxes one bit to send that money back to the taxpayer that foots all the bills.

Then when we supposedly got out of the mess of the bailouts President Obama and other elected officials quickly sold us on why we needed to pass a nearly $1 trillion dollar stimulus bill to pump up the economy. Financial analyst and economist hit the airwaves telling us that if we didn’t pass the bill then the unemployment rate would skyrocket. We had just gone from one crisis to another. And if we passed the stimulus (an amount never heard of before) then we would keep our national unemployment rate under 8%. In hindsight that is completely laughable. The rate went to well over 10% (by Washington’s calculations) and still remains above 9% now. Many economists will tell you that the real unemployment rate, when you consider the underemployed and those that have stopped looking for work, is closer to 15%. I agree with that number, although it might even be higher. What was supposed to kick start the economy only ended up giving it a light shove.

So after expanding the debt level enormously, officials in Washington, primarily with the Federal Reserve and the Treasury Department, told us that the economy needed a strong jolt, so they began the cycle of quantitative easing. I highlighted this topic in my previous commentaries on debt, and spelled out the dangers of such action and how it has failed when tried in other countries such as post WWI Germany and more recently in Argentina.

The second round of the FED’s quantitative easing is coming to an end, and it only cost you an additional $600 billion. It has been an absolute failure. Did it create some jobs? Yes. Analysts (according to a article) estimate that it helped to create about 700,000 jobs at a cost of about $850,000 each. Does that sound like a success to you? After all, you pay taxes and you have to eventually foot the bill for this, too. The quantitative easing also threw a lot of cheap money out there that has propped up the stock market, but not the economy. It has certainly helped to increase inflation despite what those at the Federal Reserve tell you. We were told that it was vital to do this in order to jump start the economy. How’s the economy looking from your point of view?

This summer we’ll be upon another instance where the word “crisis” will be tossed around. This time it will be over the budget. I’d bet a nickel that our elected officials will cry wolf and insist on raising the debt ceiling again. The only problem is that they will never stop. Either they make tough choices now and tackle serious issues, or at some point in the near future those around the world will be talking about America’s debt the way we are talking about Greece…a default and total economic collapse.

J.C. Schweingrouber, Portfolio Manager
Virginia Financial Innovation Corporation
(276) 623-2654

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