Republican Storm Message Board

Ok, good. The way you asked the question it seemed as though you were in favor of a bail out.

I am seriously busy, but since you asked....

As a general rule, the govt should not interfere with the market. On paper, we should wash our hands of them and be done with it. Incidentally, a bailout bails out the investors who made really bad decisions, not the individual homeowners.

However, there is a problem with my "in a perfect world scenario...."

The problem is that this mess is causing a global liquidity crisis and a panic. Both of these are bad and could cause irreparable harm which goes far beyond what the correction back to market equilibrium would otherwise have been. Think 1929....

I do not know if you guys are economists, amateur or otherwise, or whether you follow the markets. If you were watching TODAY, you saw treasury bonds bid up to the moon in a panicked flight to quality. At one point, the market was calling a 1.25% cut in the Federal Funds rate- that is how bad it was. The Dow was off 343 points (but recovered and closed in slightly positive territory). The Fed has added $17 billion to the money supply in order to stabilize things. An emergency rate cut (like we had under Greenspan following 9/11) is probably in order if it gets any worse. The economy is basically sounds, although weakening and possibly headed into recession. The problem TODAY is the money supply (liquidity). A bunch of hedge funds own these garbage mortgages. Investors are peeing their pants and redeeming their positions. This means the hedge funds need to sell assets at a discount to raise cash to pay the redemptions. This is the equivalent to a "run on the bank" like we saw in the Great Depression.

Because of fractional reserve banking practices, the net result is that money vaporizes on a magnitude of TEN. So, if a dollar is lost on a bad investment, $10 disappears from the money supply. How it works to multiply the money supply: 1. You deposit $100 in the bank. The Fed requires 10% be kept in reserve. That leaves $90 available to loan out. Of that $90, 10% is reserved, leaving $81 to loan, of which, 10% is reserved, leaving in turn $72.90, then $65.61, then $59.05, then $53.14, then $47.83, then $43.05, then $38.74, then $34.87, then $31.38, then $28.24, then $25.42, then $22.88, then $20.59, then $18.53, then $16.68, then $15.01, then $13.51, then $12.16, then $10.94, then $9.85, then $8.86, then $7.98, then $7.18, then $6.46, then $5.81, then $5.23, then $4.71, then $4.24, then $3.81, then $3.43, then $3.09, then $2.78, then $2.50, then $2.25, then $2.03, then $1.82, then $1.64, then $1.48, then $1.33, then $1.20, then $1.08, then $0.97, then $0.87, then $0.78, then $0.71, then $0.64, then $0.57, then $0.51, then $0.46, then $0.42, then $0.37, then $0.34, then $0.30, then $0.27, then $0.25, then $0.22, then $0.20, then $0.18, then $0.16, then $0.14, then $0.13, then $0.12, then $0.11, then $0.09, then $0.08, then $0.07 & fractions, then $0.07, . then $0.06, then $0.05 & fractions, then $0.05, then $0.04 & fractions, then $0.04, then $0.03 & fractions TWICE, then $0.03, then $0.02 & fractions, then $0.02 TWICE, then $0.01 & fractions about 4 times until the regression approaches zero. If you add all these numbers up, they amount to $1000 of $900 over and above the original $100 deposited.

Now, this money supply multiplier works in BOTH directions. So if money is written off as bad debt due to a failed investment, That same $100 shrinks the money supply by $1000

Worse still, much of the money used to buy into hedge funds is borrowed on margin. So if the investment gets sick and pukes, the investor is out, and the lender who lent him the money is out. And so it goes until there is an investor large enough to EAT the entire loss.

This is one of the rare, but very real dangers of fiat currency (money NOT backed by gold). If the perfect storm combination of things goes wrong- incredibly bad things can happen.

Incidentally, Ron Paul is probably preparing a speech right now to say "I told you so! nah nah na nah nah! :P " Ron Paul has always been an opponent of fiat currency....

For a critique on fiat currency and fractional reserve banking, read this.

Personally, I FAVOR fractional reserve banking- just so long as we are careful.

Bottom Line:

Anyway, should we bail out the investors? No. Should we prevent a shocking collapse of the money supply? Yes. We absolutely have to.