Bailouts Ahead!

Miles Franklin sponsored this article. It contains sarcasm.

You may not need a bailout but other individuals, groups, pension plans, cities, states, industries and cartels will demand one. Bailouts are an enduring feature of American life. Politicians embrace them. Huge bailouts occurred in the past and more are coming.

(Congress understood and authorized a bailout after the above drop.)

Who Pays for bailouts? Don’t ask practical questions like, “Who Pays?” Go with the flow and promote bigger bailouts as needed.

Consequences?  There are consequences—destructive and distressing consequences, but when has that discouraged politicians or central bankers? Example:  Fix an excessive debt problem with more debt…

A few consequences:

• Bailouts cost big bucks! The Federal Government runs trillion dollar annual deficits. It doesn’t generate enough dollars to fund a bailout. Hence it borrows or “prints” extra currency units. More currency units assure higher consumer price inflation.
• Higher prices. Yes, gasoline and food prices will rise.
• Moral hazard. If my neighbor gets a bailout, I deserve a bailout. Worse, we separate consequences from actions. Why change behavior if the government will subsidize bad decisions?
• When does it stop? It stops when we run out of money—nope, already there. It stops when politics no longer favors bailouts. Politicians create or enable the problems, make promises that taxpayers can’t afford and lie about costs and results. Politicians also determine who receives bailouts. Strange!

Bailouts are expensive, disruptive and create more debt. Currency units—worth a fraction of their purchasing power from fifty years ago—will devalue further. Prices rise, commodities prices will head skyward and silver and gold may become “money of last resort” as they zoom to unbelievable heights.

BUT POLITICIANS COULD DEMAND NO MORE BAILOUTS! This is talk, not action. There will be bailouts!

BAILOUT EXAMPLES:

Great Depression:  (two of many bailouts from that era)

• Home Owners Loan Corporation: This government agency purchased defaulted mortgages from banks. Sound familiar?

• Gold Confiscation – Executive Order # 6102. This was a bailout for the government and The Fed. They took the gold and citizens got paper in exchange.

Savings and Loan Bailout in 1989 for mortgages and commercial real estate loans: Investopedia claims half the S&Ls failed, and the government pumped $293 billion into the industry.

Bear Stearns: “The U.S. government, through the Federal Reserve Bank of New York, rescued Bear Stearns by lending $29 billion to JPMorgan Chase to buy the financially troubled firm.”

Fannie Mae and Freddie Mac:  “What brought down both these giants were mortgage loans to unqualified borrowers who secured inexpensive credit with minimal oversight by the lenders…”  Really, what could go wrong with the common practice of lending big bucks for a huge NINJA mortgage? NINJA is No Income No Job or Assets. The U.S. government bailed out Fannie and Freddie to prevent their bankruptcies.  Fannie Mae $116 billion, Freddie Mac $71 billion.

TARP:  The troubled assets program – $700 billion.

AIG: $85 billion.

General Motors: $50 billion

Bank of America: $45 billion

Citi Group: $45 billion

GMAC: $16 billion

Many more.

Federal Reserve: $16 trillion in commercial bank bailouts, QE, low interest loans, swaps, guarantees and more.

WHAT ABOUT FUTURE BAILOUTS?

Banks:  Supposedly taxpayers will no longer bailout banks.  Instead, depositor funds will be used to “bail-in” and save the banks. Might be hard on depositors…

Pension Plans – States:  Many reports have documented the pension woes ($ trillions under-funded) of states (Illinois, New Jersey, Kentucky, California and others). Will politicians let pension funds collapse or demand Federal bailouts?

Pension Plans—Cities and Counties:  Same problems—under-funded pension benefits and health insurance costs overwhelm city and county budgets.

Pension Plans – Private:  Some are more under-funded than others.

Sub-Prime Auto Loans:  Potential bailout for the lenders?

Mortgages:  Interest rates on the 10 year Note bottomed in mid-2016 and have risen since then.  Mortgage rates have reached multi-year highs. Will another bailout for Fannie, Freddie or FHA become necessary as homeowners default? Bailouts ahead!

Derivatives on interest rates and debt obligations:  Derivatives generate profits for banks in good times.  What happens when interest rates spike and counter-party risk becomes huge? Will we see a repeat of the credit crisis of 2008 complete with massive bailouts? Deutsche Bank?

Universal Basic Income—UBI:  A guaranteed income for everyone.  It’s only a proposal, for now.  A UBI is a bailout for everyone, but don’t ask how to pay for it.

THE BOTTOM LINE:

• Bailouts have been relevant for 80+ years. The financial crisis of 2008 created the “need” for huge bailouts, government guarantees, near zero rates, emergency Federal Reserve loans, QE, debt increases, “stimulus” and more. What has changed with banking and financial practices to prevent a similar crisis? “Too big to fail” banks are now even larger.

• Bailouts create massive debt and further devalue dollars.

• Bailouts create profits for the elite and losses for taxpayers. Bankers depend upon this unequal distribution of wealth – privatize profits and socialize losses.

• When dollars devalue, prices rise. Silver and gold, on average, retain their purchasing power. More bailouts are likely (inevitable) for public pension plans, state and city governments, private pension plans, and more. We need silver and gold for protection.

• We live in a “Bailout Nation.” Political decisions favor bailouts and “something for nothing” programs. Gold and silver should come to mind as essential insurance against the inflationary consequences of bailouts.

Miles Franklin sells silver and gold, which will preserve purchasing power for savings and retirement assets. 

Miles Franklin cannot prevent politicians and bankers from authorizing more bailouts and further weakening the dollar’s purchasing power.  Plan accordingly.

Gary Christenson