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Another Week, Another Bailout

Mar 23, 2009

The Treasury Secretary has announced yet another bailout plan today. It is to induce banks to buy toxic mortgages (which are killing the current owners) by a government offer to purchase the toxins in the mortgages, so that the purchasers are left only with the cattle-generated fertilizer (CGF's).

Those toxic mortgages are said to be worth about 30 cents on the dollar--or they would be, if anyone was buying. The problem is, no one will buy them even at 30 cents on the dollar, because everyone knows their true value--ZERO.

But the newest government proposal is to subsidize the toxic mortgage industry to see if they can sell toxic mortgages for any amount above zero.

It's like going to a garage sale and buying old shoes at designer prices and then applying for a government rebate to make up the price differential.

But once we have those old shoes, we can't find an occasion to wear them, because they are too old and worn to be of much use. Would it not be better just to buy new shoes and throw away the old ones?

Well, this is just another creative plan to take money borrowed from China and give it to the bankers who have lost money after paying themselves bonuses for making bad investments.

But the people are starting to come down with bailout fatigue, especially after the most recent Geithner-approved AIG bonuses. Any more gaffes like this and Geithner may become too big a political albatross for Obama to carry. There is taxpayer revolt in the wind. So far it is only taking the form of anger--mostly by Obama's political opponents. When disillusionment hits Obama's supporters, then he will be in trouble. He can handle anger from opponents, but supporter disillusionment is his biggest danger. The ones not disillusioned will be the beneficiaries of the bailouts.

Back in January, I figured it would take a few months and a few bailout plans for this disillusionment to hit the public at large. There will always be enough people to give the bailouts a chance, but the public does not have enough patience to wait for these to work--and their impatience increases with each bailout-induced executive bonus.

Of course, I don't think that the bailouts would have worked anyway, because they are based on the theory that government can socialize private debt. At best, this course of action can only postpone the inevitable. Government financial gurus knew they could not do it all at once, because the figures would be so staggering that it would cause instant revolt. So they decided to institute trickle-down bailouts, a trillion here and a trillion there. And they divided up the bailouts between the government, the Treasury, and the Fed to confuse public perception.

This tactic has worked only because the people have been misled into believing that each bailout is the last one. The problem is that after four or five failed bailouts, the people are beginning to realize that the government is paying bailouts on the monthly installment plan. Is this like a huge 30-year public mortgage?

It is only a matter of time before the people become so angry that Congress begins to fear for its political life. The recent 90% tax on AIG bonuses is a good example of how fear can motivate Congress like no other emotion, and given them enough adrenalin to go from zero to sixty in 4.5 seconds.


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Dr. Stephen Jones


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