�The prospects of a
government rescue for the foundering American automakers dwindled Thursday as
Democratic congressional leaders conceded that they would face potentially
insurmountable Republican opposition,� reported the NY Times last
Dwindle On Bailout Plan For Automakers, By David M. Herszenhorn,
November 13, 2008].
Wow! The entire country is steamed up over the Republicans
bailing out a bunch of financial
crooks who have paid themselves fortunes in bonuses for destroying
America�s pensions. Why do Democrats want to protect Republicans from further
ignominy by not giving them the opportunity to vote down a bailout for workers?
Quick, someone enroll the Democratic Party in Politics 101.
GM�s divisions in Canada and Germany are asking those
governments for help. It will be something if Canada and Germany come through
for the American automaker and the American government doesn�t.
Conservative talking heads are saying GM is a �failed business model� unworthy of a
$25 billion bailout. These are the same talking heads who favored pouring $700
billion into a failed financial model.
The head of the FDIC is trying to get $25 billion -- a
measly 3.5 percent of the $700 billion for the banksters -- with which to
refinance the mortgages of 2 million of the banksters� victims, and Bush�s
Secretary of the Treasury Paulson says no. Why aren�t the Democrats all over
Apparently, the Democrats still think they are the minority
party -- or else their aim is to supplant the Republicans as the party of the
Any bailout has its downsides. But if
America loses its auto industry, it will lose the suppliers as well and
will cease to have a manufacturing sector. For years no-think economists have
been writing off America�s manufacturing jobs, while deluding themselves and
the public with propaganda about a New Economy based on finance.
A country that doesn�t make anything doesn�t need a
financial sector as there is nothing to finance.
The financial crisis has had one good effect. It has cured
Democratic economists like Robert Reich and Paul Krugman of their fear of
budget deficits. During
the Reagan years, these two economists saw doom in the �Reagan deficits� despite the fact
that OECD data showed that the US at that time had one of the lowest ratios of
general government debt to GDP in the industrialized world.
Today Reich and Krugman are unfazed by their recommendations
of budget deficits that are many multiples of Reagan�s. Moreover, neither
economist has given the slightest thought as to how the massive budget deficit
that they recommend can be financed.
Both recommend large public spending programs. Krugman puts
a price tag of $600 billion on his program. If it takes $700 billion to save
the banks and only $600 billion to save the economy, it sounds like a good
deal. But this $600 billion is on top of the $700 billion for the banks, the
$200 billion for Fannie Mae and Freddie Mac, and the $150 billion for AIG.
These figures add to one trillion six hundred-fifty billion dollars, a sum that
must be added to the budget deficit due to war and recession (or worse).
What we are talking about here is a minimum budget deficit
of $2 trillion. The US has never had to finance a deficit of this magnitude.
Where is the money coming from?
The US Treasury doesn�t have any money, and neither do
Americans, who have lost up to half of their savings and retirement funds and
are up to their eyeballs in mortgage and consumer debt. And unemployment is
There are only two sources of financing: foreign creditors
and the printing press.
I doubt that foreigners have $2 trillion to lend to the US.
Thanks to the toxic US financial
instruments, they have their own bailouts to finance and economies to
stimulate. Moreover, I doubt that foreigners think the US can service a public
debt that suddenly jumps by $2 trillion. At 5 percent interest, the additional
debt would add $100 billion to the annual budget deficit. In order to pay
interest to creditors, the US would have to borrow more money from them.
Economists and policy-makers are not thinking. This enormous
financing need comes not to a well-managed economy that can take the additional
debt in its stride. Instead, it comes to an economy so badly managed that there
are no reserves.
Massive US trade deficits have been financed by giving up US
assets to foreigners, who now own the income flows as well. Budget deficits
from six years of pointless wars and from unsustainable levels of military
spending have helped to flood the world with dollars and to drive down the
dollar�s exchange value. Consumers themselves are drowning in debt and can
provide no lift to the economy. Millions of the best jobs have been moved
offshore, and research, design, and innovation have followed them. Considering
America�s dependency on imports, part of any stimulus package that reaches the
consumer will bleed off to foreign countries.
Generally, when countries acquire more debt than they can
service, they inflate away the debt. If foreign creditors do not save the Obama
administration, the Treasury will print bonds and give them to the Federal
Reserve, which will issue money.
The inflation will be severe, particularly as Americans will
not be able to pay for the imports of manufactured goods from abroad on which
they have become dependent. The exchange value of the dollar will decline with
the domestic inflation. Once inflation is off and running, the printing press
dollars will only have goods made in America to chase after. The real crisis
has not yet begun.
Paulson should rethink the automakers� and FDIC�s proposals.
A bank produces nothing but paper. Automakers produce real things that can be
sold. Occupied homes are worth more than empty ones.
Paulson�s inability to see this is the logical outcome of
Wall Street thinking that highly values deals made over pieces of paper at the
expense of the real economy.
Craig Roberts [email
him] was Assistant Secretary of the Treasury during President
Reagan�s first term. He was Associate Editor of the Wall Street Journal. He has
held numerous academic appointments, including the William E. Simon Chair,
Center for Strategic and International Studies, Georgetown University,
and Senior Research Fellow, Hoover Institution, Stanford University. He was
awarded the Legion of Honor by French President Francois Mitterrand. He is the
author of Supply-Side
Revolution : An Insider�s Account of Policymaking in Washington; Alienation
and the Soviet Economy and Meltdown:
Inside the Soviet Economy, and is the co-author with Lawrence M.
Stratton of The
Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the
Constitution in the Name of Justice. Click here for
Peter Brimelow�s Forbes Magazine interview with Roberts about the recent
epidemic of prosecutorial misconduct.