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Was TARP Just a Diversion?

December 13, 2011

I have watched so many documentaries and movies about the 2008 ‘financial crisis’ that I may be getting them mixed up at this point. But I believe it was the HBO special “Too Big to Fail” that intimated a scene where U.S. Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and other policy “gurus” met with our nationally elected leaders and told them if they did not immediately bail out our illustrious financial institutions, we would all experience a complete financial meltdown. I have heard other accounts of how our elected leaders came out of this meeting ashen-white.  

It was then played out for the world to see; if our government had not acted quickly, our nation would have experienced the worst financial calamity since the Great Depression. Our leaders buckled and now history will be the final judge. I always argue that we need to make monumental decisions with a historical perspective. Not only should we understand how we tend to repeat mistakes, but we should ask ourselves what our history books will write about these events and decisions. My guess is that our children, grandchildren and great grandchildren will read their history books and see this very series of decisions, the flurry of activity and central bank’s/government’s intervention as a monumental time in history. Don’t we at least owe it to the next generation to ask some serious questions like, “how the heck did we get into this position in the first place?” And second, question those who were supposed to be watching out for our economic well-being about why their recommendations at this point should be trusted?  

If I were in a meeting with the very same individuals who not only denied the real estate bubble, but blindly defended its existence even as the melt own had already begun (and this wasn’t the first time they showed blind faith in financial markets), I would have been very skeptical of their advice that, “It is time for us to take bold action!” Ultimately, there was a very public display of approving a $750 billion bailout package for Wall Street… oops, I’m sorry, pundits told us it was not really a Wall Street bailout, it was being done for “Main Street,” because they needed to free up credit, or we ‘Main Streeters’‘ would be the ones to suffer most. Never mind the fact that all this massive amount of liquidity never ended up making it to Main Street.

There were very public debates and significant news coverage regarding the federal government bailout/stimulus/TARP packages. At the time this was happening I publicly questioned whether it was just cover for the real beast in this story. The ungoverned Federal Reserve was handing out essentially free money behind the scenes to anyone who could breathe, especially large financial institutions. We have recently learned that our central bankers handed out $7.7 trillion, or 11 times the original TARP package, and we have heard nothing about the Feds’ actions until now. It was done completely in stealth mode while ample debate played out publicly over a relatively small government bailout. Was it Paulson’s and Bernanke’s plan all along to create a diversion away from the real money bailout? I don’t know, but it seems absolutely comical to me that all the attention was on less than 10 percent of the real money infusion. And it seems sad to me that the Federal Reserve can give $7.7 trillion in interest-free money with absolutely no oversight or reporting requirement.

Now the Federal Reserve will defend their actions by claiming that their free loans have been repaid. And I will argue that the big banks used the free money to make money through “carry trade.” I will explain this at another time, but needless to say, it is easy to make money on huge sums given to you at zero percent interest rate without taking any real risk. This is a rigged game. But here is the real point. We have never had so much intervention and liquidity infusion in all of history and it is very apparent that it is not working, yet there are already rumors of another quantitative easing action (QE-3) in the works. I don’t know if the Federal Reserve will propose QE-3 or not, but when do we finally tell the king he has on no clothes? How is it that we think repeating the same actions that have failed abysmally will still somehow work this time? The ‘liquidity drug’ is obviously a very powerful and addictive drug, but there will also be a very impactful long-term effect from all this cash infusion (akin to an addiction).

Later this week I will share a chart of the Fed balance sheet. It is an amazing picture that puts a visual to what I have written above.

One Comment
  1. Randy Nethery permalink
    December 13, 2011 10:10 pm

    I read your WSJ piece and your letter to Calpers. Wow, what foresight. Most of the world’s most notable contrarians weren’t locked on at that early stage. I just wish they would have listened. Your advice would have saved Calpers many billions of dollars and a whole lot of misery.

    I believe the end-game can only produce two possible outcomes: Serious inflation (possibly hyperinflation, but probably not), or a long-term depression (most likely scenario). I believe the Fed will continue to provide more quantitative easing, which will assuredly increase the level of misery for everyone when they are forced to reform the system.

    Throughout history, every country (without exception) that failed to live within its means either suffered through a horribly traumatic depression, or failed to continue its existence. Unfortunately, no country in the history of mankind has had a fraction of the debt we now possess. Without getting too ‘end of the worldish’ I would advise everyone to live as frugally and debt-free as possible. We can all survive on less and I think we’ll soon have the opportunity to re-learn what is really important and what is not so important.

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