Sunday, September 28, 2008


The American government's $700 billion bailout of Wall Street is a fraud because there is no money to buy the debt associated with the rescue. The United States government has a debt, with the bailout, of more than $11 trillion. As I have stated before, the government is buying debt with debt like the credit default swaps that created the crisis in the first place.

Some definitions are in order. Essentially, a credit default swap is insuring the owner of a debt that the debt will be paid. If the debt is not paid or bought, then the insurer is stuck with the bad debt. Many of the banks and securities with trouble now had insured or bought credit default debt. What the United States government plans to do is to buy the companies' bad debts and assets and hold them until the toxic financial products can either be sold as debt or wait until the magic moment until the economy supposedly recovers to sell off the real assets at a better price. The American government plans to purchase this all with the non-existent money in the United States Treasury.

The bailout is down a rabbit hole but not through a looking glass in terms of sense and rational thought. The problem could have been contained with legislation that mirrored the Glass/Stegall Act which forbade banks from offering investment, commercial banking services , and insurance services in the same corporate entity. Banks that offer all three endanger citizens' money through speculation not saving. The Republican Party, led by Phil Gramm, destroyed the barriers to prudent banking. However, a Glass/Stegall provision is not a part of the current bailout scheme. Serious bank reforms that will prevent imprudent corporate investments are necessary before a true bailout of the American economy can occur.

UPDATE: In the middle of this financial scandal, the National Republican Congressional Committee has one of its own. Wachovia, a bank Wells Fargo has now bought, was in serious trouble and on the brink of bankruptcy. Despite its financial woes where the managers froze credit to institutions and other ordinary lenders, the bank loaned $8 million to the NRCC to continue its political campaigns. The full story is at Daily Kos.
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