Home > Classic Prechter
Bailing Out Speculators Just Like a Bad Liver Transplant
Nobody wants the U.S. and global financial systems to seize up, but the most recent bailout proposals from the U.S. Administration have got citizens up in arms. It seems we don't want to be on the hook for at least $700 billion without some hope of getting paid back sometime in the future. Even before Congress and the Administration began negotiating this past week about the unprecedented bailout for Wall Street, Bob Prechter put out an Interim Bulletin, which points out that this kind of transfer of billions from the private to the public sector is like a liver transplant gone terribly wrong. Read the excerpt below to see what he means.
The "Impossible" is Happening, writes Bob Prechter in his September
Elliott Wave Theorist. He goes on to elaborate under these headings: The Fed's "Uncle" Point is in View; The Last Bastion Against Deflation: The Federal Government; and a Q&A about Righting Some Misconceptions About the Latest Bailout. Get more information about this
Theorist and
how to subscribe here.
* * * * *
Another Day, Another Boondoggle
By Bob Prechter
Elliott waves are natural events, and the spectacle of recent weeks is part and parcel of the way bear markets progress. Recent “fixes” (bailing out the speculators) of the “problem” (a simple, natural, downtrend) are normal in the biggest bear markets, such as during the 1929 crash. Unlike 1929, though, this time the government, not just a group of banks, is concocting and bankrolling the schemes.
The explosion in government-sponsored credit from 2001 to the present—from the accommodating Fed to the government’s lending agencies—has distorted the measuring unit for the Dow beyond recognition. Our Dow/gold chart shown in recent issues gives the true value of the Dow, i.e. the value of the Dow in real money. The slaughter of stock values began in July 1999 and continues. The Dow was worth 43 ounces of gold in 1999; today it is worth 12. If we had honest money, the nominal Dow today would be trading at 3300. The true bull and bear cycles would be clear to all. But instead we had to endure the spectacles of an aggressive Fed easing lending rules and a dozen government agencies feverishly creating mortgages and other IOUs. These actions ballooned the credit supply immensely from 2001 to 2007, driving down the value of the dollar. But what has happened in recent days is far more unconscionable.
The government’s bailout of AIG is “the most radical intervention in private business in the central bank’s history, [which] effectively puts taxpayer money at risk while protecting bad investments made by AIG and other institutions it does business with.” (NYT, 9/17) The Treasury is funding the deal through the Fed with a special opening bond issue—surely the first of many—of $40b. According to calculator-tappers, the government in recent days has pledged or exchanged a trillion dollars worth of its own IOUs for the current and future bad IOUs of banks, brokers, AIG insurance, Fannie Mae, Freddie Mac and the Federal Housing Administration. This number, like the original projected cost of Boston’s Big Dig, is a low-ball estimate. These institutions carry tens of trillions of dollars worth of potentially bad debt and derivative contracts.
But wait. The trillion-dollar figure covers the government’s promises only through Thursday. As of today, we learn further that the government is now presenting a plan to “create a new entity” into which favored speculators on the hook can throw their worthless paper under a government guarantee, backed by the taxpayers, a “Resolution Trust” type of bag except many times bigger. The New York Times notes, “Analysts attributed the stock market rally not to a fundamental improvement in the financial environment, but rather to reports that the government might be planning to quarantine some of the worst assets held by major banks.” (9/19)
“Quarantine” is a silly word; a better analogy is that the government is taking diseased livers out of its alcoholic buddies and shoving them into the public’s guts and vice versa. The low-ball estimate for this latest scheme? Another trillion.
By such machinations, politicians are converting bales of privately issued bad credit into what the government calls money. As we know, values do not come from nothing. So where does the value handed over to all these broke creditors come from? It comes from taxpayers’ future assessments and savers’ bank accounts. When the government monetizes debt, it reduces the value of all other dollars. American savers, through a developing contraction in the credit supply, were all set up to recoup some of the devastating losses in their purchasing power, but the government stepped in and stopped it by turning bad IOUs into cash and government debt. Effectively, by force of edict, it has placed windfall profits in private hands and dumped accumulated losses onto the public.
The "Impossible" is Happening, writes Bob Prechter in his just-published
Elliott Wave Theorist. He goes on to elaborate under these headings: The Fed's "Uncle" Point is in View; The Last Bastion Against Deflation: The Federal Government; and a Q&A about Righting Some Misconceptions About the Latest Bailout. Get more information about this
Theorist and
how to subscribe here.