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« Back to Opinion & Analysis
Government Bailout Will Prolong Financial Crisis
Editorial for the Houston Community Newspaper
Steven F. Hotze, M.D.
December 1, 2008
Wall Street does not represent free enterprise capitalism but rather corporate statism. Working in collusion with Washington politicians and financial regulatory bureaucrats, the Wall Street financiers created the speculation in financial instruments like mortgage security derivatives, credit default swaps and credit debt obligations, and sold these to investors and banks around the world. They produced incredible profits for the investment bankers and the speculators.
These Wall Street financial instruments were all based upon home mortgages, so when the housing bubble burst, these financial securities crumbled like a house of cards.
Who did President Bush place in charge of solving the problem? None other than Treasury Secretary Henry Paulson, former CEO of the Wall Street investment bank of Goldman Sachs. Paulson is one of the individuals who had to be deeply involved in the apparently corrupt and unethical activities on Wall Street. Paulson has made sure that he protected his Wall Street colleagues and Goldman Sachs in the bailout, and also made sure that Goldman's main competitor, Lehman Brothers, went down without any government aid. All this has been done to the detriment of the taxpayer and small businesses which are the true economy of our nation.
Paulson should have resigned his post because of this obvious conflict of interest. Within two years someone will write the inside story revealing what really drove Paulson's decisions and actions.
This month's Portfolio Magazine, the link to which is found below, contains an article written by Michael Lewis who worked in the late 1980s for Salomon Brothers, a Wall Street Investment Bank which was later bought by Citibank. Lewis is the author of the 1989 best seller Liar's Poker which exposed the questionable investment tactics used at Salomon Brothers. I read Liar's Poker at that time because I had a close friend who was then working for Salomon Brothers. This article by Lewis explains the genesis of the sub prime mortgages, credit default swaps and credit debt obligations through the lives of several key Wall Street hedge fund partners who, in 2006, had discovered the scam which Wall Street was foisting upon its investors. It's a riveting and essential news piece which will help you better understand what has taken place in the financial markets and why.
Shortcut to: http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom
This article neglects to expose the federal government's actions through the Community Investment Act which required banks to make sub prime mortgages available to non credit worthy individuals. Once mandated to do so, the banks and mortgage companies simply originated the mortgages and collected the origination and closing fees and then sold the mortgages to Freddie Mac or Fannie Mae, which in turn bundled these mortgages into security packages and sold them to investors and other banks. The Fannie Mae, Freddie Mac and Wall Street executives contributed heavily to U.S. Senators and Congressmen to keep them from requiring stricter scrutiny and regulation. It was a win-win for everybody until the housing bubble burst.
Without giving a long explanation, allow me to warn that this downturn could be very severe, worse than anyone who is in a position of authority realizes or is willing to say. The likelihood of financial disaster exists because of the enormous personal and national debt we have accumulated. This type of personal debt did not exist prior to the Great Depression and yet look what happened then. People did not use credit cards for consumables in the 1920s or 30s. They paid cash for them.
We have attempted to build our future upon consumer debt and government entitlement programs. This debt must be and will be liquidated, one way or another. Cash is king right now while we are experiencing a deflationary downturn, but the government cannot allow this deflation to continue because it dramatically increases the cost of its indebtedness.
The federal government will do what governments always do; it will inflate the currency dramatically, thus monetizing the debt. Government has already begun this action by initiating its $700 billion bail out program. The federal government has already obligated itself for over $5 trillion to stave off a depression. This will only ensure that one will occur. Do not be surprised if the number reaches $8-10 trillion. This money will be obtained by selling pieces of paper called Treasury Bills and government bonds, increasing our national debt beyond what could ever be repaid. This will dramatically increase the money supply and will inexorably lead to massive inflation. Couple this inflation with the coming insolvency of the Social Security System and Medicare and a scenario exists for dissolution of the US government similar to what happened in Russia after the fall of the Berlin Wall.
$5 trillion would pay for 25 million homes each with $200,000 mortgages or buy 125 million SUVs at $40,000 each. I am not suggesting that the government do this but this just gives you an idea of the magnitude of the dollars which the government is spending.
Obama is appointing the very individuals to his cabinet from Wall Street who caused the financial debacle to begin with. So much for “change.” Add another huge deficit by the Obama Congress next year and you can be assured that within the next two years price inflation will explode. Before that time it would beneficial for you to own gold coins and invest in income producing property.
You must guard yourself against any inclination to place your trust in the government’s promise to solve our economic problems. Historically government intervention has compounded the problem. The Great Depression began in 1929. In 1938 unemployment peaked at over 20%. The stock market did not reach pre-depression levels until 1954.
Throughout history governments have been tyrannical. They have killed citizens who opposed them and confiscated their wealth. The one exception has been our government since our nation’s founding in 1776. Do not be deluded into thinking that our government will not ultimately be any different than the rest. When socialists take power their goal is to destroy economic, political and religious liberty. Forewarned is forearmed.
The price of liberty is eternal vigilance. We must challenge the forces of collectivism that have been swept into power.
About Conservative Republicans of Texas
Steven F. Hotze, M.D. is president of Conservative Republicans of Texas and founder of Hotze Health & Wellness Center in Houston, Texas.
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