The Truth About Bailouts

[Crewleader]

by Peter Schiff, Euro Pacific Capital | November 21, 2008

As the Federal bailout bonanza prepares to spread beyond the mortgage and financial sectors to fill Detroit's depleted coffers, few economic or policy analysts have spared a thought for the destitution of the U.S. government itself. Put simply, our government doesn't have enough spare cash to bailout a lemonade stand let alone a bloated and failing industry that is losing tens of billions of dollars per month. Washington can only offer funds that it has borrowed from abroad or printed. Unfortunately, the nation is in the grips of a delusion that money derived from these sources has the power to heal. But history has clearly shown that borrowed or printed money only has the power to destroy.

The argument that energizes the pro-Detroit camp is that the government should extend the same courtesy to the rank and file auto workers that it lavished upon the fat cats of Wall Street. While two wrongs certainly do not make a right, the fact remains that the Wall Street firms are still floundering despite the bailouts. What's worse, the money spent was either printed or borrowed from abroad. Both options are destructive to America.

When it comes to bailouts, the real discussions are not centered in Washington but rather in Beijing, Tokyo, and Riyadh. With no money of our own, our ability to bailout our own citizens is completely dependent on the world's willingness to foot the bill. While I am sure that Bush and Paulson are doing their best to convince the world that open ended financing of the United States is in the global interest, my guess is that, unlike Congress, our foreign creditors will see through the self-serving nature of our plea.

http://www.financialsense.com/fsu/editorials/schiff/2008/1121.html

[Psephos]

1. They only "foot the bill" if the US defaults on the bonds it sells them

otherwise, they make a profit on "footing the bill."

The US still has an AAA credit rating. They are pretty sure they will get paid.

[ixion]

2. you speak as though that credit rating were secure... it is not

and if we continue in this direction, it will most certainly be downgraded, at which point the playing field will change considerably.

[Psephos]

5. The bonds are issued with the current rating, not a future worst-case projection

If the US defaults on T-bills, then it will default on Social Security payments, Medicare, grants-in-aid to states, and a whole lot more.

If you think Obama and the Democratic Congress are going to let that happen, you're smoking better weed than me.

The US doesn't have a revenue problem, it has a spending problem. We spend more than we collect, and most of what it's spent on could be cut back if anyone was dead serious about balancing the budget.

[Coes]

4. AIG was an AAA-rated company

how decent are those ratings anyway, one might as in the first place

[ixion]

3. This has been one of my primary reasons against bailouts

we don't have the money, and we shouldn't be borrowing money we don't have to give to bloated corporations to cover their a**.

By borrowing/printing the money, we make things worse, not better.