Economic Bailout in Simple Words - Lesson One
Many of you reading this blog are wondering what it all means - the $700 billion bailout which might actually be $2 trillion, the Federal Reserve pumping cash into the system, and all these other economic/fiscal codewords that you don’t exactly know the definition of.
Well, here’s your first lesson. It focuses on the ‘buying of commercial paper’ that the government is doing.
Quote:
Morning Edition, October 7, 2008 · The Federal Reserve announced Tuesday a dramatic plan to buy massive amounts of short-term debts in an effort to break through the country’s credit clog. Officials say the Fed will buy ‘commercial paper,’ a short-term financing mechanism that many companies rely on to finance their day-to-day operations, such as purchasing supplies or making payrolls.
This essentially means that the federal government is spending your tax dollars - both current and future ones - on the purchasing of private equities and securities from distressed companies. What this means is that the elected few that know better than us will be picking out companies that they think deserve our money and handing it over to them to help them continue operations.
Undoubtably you’ve heard of the company AIG - the company that Paulson bailed out, right?
Exhibit A why you shouldn’t vote for people who plan to use your money:
Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said. -New York Times, September 27, 2008
Why is this important? Well, what if I told you that Paulson had $700 million held in a blind trust and his family had $100 million worth of shares of… Goldman Sachs?
Would this make you wonder? No? Ask yourself - why did the Fed bail out AIG but not Lehman Brothers?
Exhibit B on why you should not trust the state to spend your money:
AIG Executives Blow $440,000 After Getting Bailout
If you’d just gotten a government bailout, you might be tempted to hold a retreat at a nice California hotel — and that’s exactly what American International Group (AIG: 3.42, -0.09, -2.56%) employees did.
The committee on Oversight and Government Reform held a hearing on Tuesday at 10:00 a.m. Eastern time. to address and examine downfall of AIG, the world’s largest insurance company. The committee planned to discuss the financial excesses and regulatory mistakes that led to AIG’s government bailout.
One of the items discussed was AIG’s expenditure of $440,000 for a corporate retreat at the St. Regis Monarch Beach resort in Dana Point, Calif., about midway between Los Angeles and San Diego. These funds were spent on Sept. 22, a week after the Federal Reserve extended an $85 billion emergency loan to AIG to keep it from going bankrupt due to insurance liabilities.
Click here to see the full hotel bill.
Warning: PDF
The long and short of it is that the commercial paper being bought right now is simply not enticing enough to private investors - like you, me, Bill Gates, Warren Buffet, etc. We don’t want it, because the companies are run poorly, carry too much debt, and are not wise investments. Makes sense, of course.
What doesn’t make sense is the government forcing us to invest in these companies with our tax dollars, likely in a less efficient way with less accountability. The money you pay in taxes goes towards investments that the smartest people in the world would never touch - and you have no say in it. You also have no control over these entities unlike you would if you had actually purchased shares in the company; instead, the government (and people like Paulson) do get control.
If you made it through this post, there’s a good chance you’re a libertarian-minded individual who has the good sense to think about the economy and our future instead of voting on stupid buzzwords like “Hope,” “Change,” or “Maverick.” These people are politicians who seek to control your life and make millions in the process of doing it. There is only one politician who doesn’t accept any government money or pension, who doesn’t take out federally subsidized loans for his children to go to college, and who John McCain himself called “the most honest man in Congress.” Ron Paul.
It might seem like a long time ago, but George W. Bush talked about fiscal conservatism and continuing the economic ideas of Bill Clinton. Will you remember in 4 years what Obama and McCain promised about our economy?
Think before you cast your vote.
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