Bailout Fever Meets with Resistance

When being grilled before the Senate Banking Committee, Donald Kohn, vice chairman of the Federal Reserve refused to reveal the names of financial firms that have been saved or have come to benefit from the huge and ongoing bailout of of AIG. In fact, several of the committee members grew so irate that they threatened that Kohn with the prospect of no more dollars for the credit crisis if he didn't divulge the Federal Reserve's secret. In the old days, this would be similar to threatening your favorite sugar daddy that you wouldn't borrowing any more money. However, these days the reputation, functioning and profitability of the Federal Reserve is very much dependent on the goodwill of American politicians and visa versa, at least in the traditonal sense. However, the rift of information between the government and the Fed is very much a result of the Federal Reserve being an independent corporation that is beholden only to itself. If the Federal Reserve was simply another government agency, the U.S. government and lawmakers would already have the information in their hands.

Republican Jim Bunning, in the confrontation style that he has adopted, vowed to do anything to the Fed from wasting taxpayer on a lost cause. Republican Richard Shelby, a member on the Banking Committee, has announced that the U.S. should not imitate the folly of Japan, which propped up failing banks in 1990s with the result of delaying of delaying an economic recovery. When the Feds elected to save American International Group from destruction, they bailed out Wall Street and foreign investment banks that manipulated the credit rating system with unwise financial choices that should have already put them out of business. Instead, these investment banks continue to survive what would have resulted in a catastrophic failure.

The government bailout made everyone whole with a cash infusion so that these companies could operate as before while the toxic securities continue to fester as a sore instead of being eliminated from the system. Therein lies the continuing problem that lies before the U.S. economy and the world. Nobody has really taken the loss for the financially deadly securities as they still expect them to have some redeeming value at some time in the future. That outlook is much like expecting a corporate entity that went bankrupt and was fully liquidated to continue to have some value. If Citigroup stock fell through the floor, would it be worth anything? For those that don't know the answer, the answer is a resounding no. Toxic debts in an industry can't use them because of flawing concepts used in their financial construction are no more likely to increase in value. The fact is that downgrades in value are theoretical and dependent on revealed toxic debt. The toxic banking debt including collateralized debt obligations are virtually worthless and should be considered with that reality.

The empty argument that Kohn used was that anonymity was expected in dealing with AIG contracts. Naming the corporate miscreants might keep them from doing business with AIG. Please! Considering that AIG is no longer truthfully a viable business that is wholly held up by taxpayer funding through the U.S. government makes this argument a mute point. AIG has become a failed institution fully propped up and unlikely to be able to redeem itself or its holdings at any time in the near or perhaps even the distant future.

Even Kohn admitted in the Senate hearing that because of the bailout, there exists little incentive to be careful or to avoid moral hazard in the future. This continues to be the problem in the industry as a whole. Uncle Sugar is always there, supposedly to protect the interests of the American taxpayer because the banking system that is tied into the criminal fraud perpetrated by educated men and women that knew better. The promise of the gamble was simply too enticing to resist.

National Satellite Cable Corporation, http://www.cspan.org/Watch/watch.aspx?MediaId=HP-A-16057

E. Manning, http://www.digitaleconomy.wordpress.com