The US Treasury recently announced a plan of preposterous proportions to pay for the mistakes of large institutions. How is this good news?
The american economy has historically been based on freedom and capitalism. People and companies are free to make decisions. People are free to bet that stocks will go up or down. These decisions can lead to failure or success. When a business fails, it either goes bankrupt or is purchased by another entity.
What we are seeing now is a goverment that is picking and choosing who succeeds and who fails.
This is very similiar to how the Bush administration has hand picked christian run companies to run the war in Iraq and Afganistan. This is a form of corruption.
In addition to picking and choosing who succeeds or fails, the goverment has sided with the losers not the winners. AIG was apparently over leveraged and selling risky insurance products. Now the government is crossing its fingers and giving away taxpayer money hoping that the plan will work out.
The goverment is so afraid of a recession that it is printing enormous amounts of money to try and stop the inevitable recession.$85 billion dollars of taxpayer money has been loaned to AIG. Much of this will most likely be lost.
They have even come up with a plan to spend nearly half a trillion dollars to purchase distressed mortages which will more than likely never be paid back.
They are even restricting freedoms such as short selling which is harmless.
What this plan is going to lead to is massive inflation as more companies continue to fail. The alternative is that some companies will fail, we enter a period of high unemployment and credit contraction. The goverment wants to continue the policy of credit expansion which will lead to inflation and a weakened dollar.
The result of this is that we will all have to pay more to borrow money. Mortgages will go from 6% to 10-20% and will make all other types of lending expensive as well.
The goverment can try and fight it, but the economy will have to slow in one way or another. Flooding the market with dollars and bailing out failing companies will not stop the slowdown and credit contraction.
Invest Jim Rogers said it best when he said that recessions are a natural process just like wildfires and that they are there to clear up the mess.
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