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Why Bailouts Are Not the Answer
Seeking Alpha ^ | 2008-12-02 | Peter Schiff

Posted on 12/06/2008 10:26:28 AM PST by rabscuttle385

Keeping track of the ever mutating bailout debate is becoming increasingly difficult. With the Federal money spigots now thrown wide open, and with no one of influence advising restraint, the only debate is where to direct the torrent. During the past week, the talk began with Detroit and Citigroup, but by Friday had shifted to a massive "stimulus package" to bail out consumers. The early buzz includes some very large figures. But first, a bit of a recap:

On Monday, the $300 billion Citigroup bailout took center stage. Once again Henry Paulson decided to throw taxpayer funds into a bottomless Wall Street money pit. Shockingly, the Citigroup plan did not seem to demand any serious curtailment of lavish salaries and bonuses. Paulson's shameless largesse to his Wall Street friends has elevated financial industry bonuses to entitlement status.

"Remember Lehman" now seems to be the rallying cry to justify any and all financial bailouts. But Lehman's demise is in no way responsible for our current problems, and the decision to let them fail is the only bright spot in otherwise consistent record of policy mistakes. We bailed out Bear Sterns and AIG, and what did that get us?

The Citi bailout greatly increases the chances for a similarly misguided auto industry bailout. After all, if taxpayers ensure multi-million dollar bonuses for Citi executives, how can they refuse similar help for eight-figure auto executives and $70 per hour unionized auto workers?

It was inevitable that the size of these bailouts would up the ante for an economic stimulus package aimed at consumers. Not missing a beat, Barack Obama announced a $700 billion dollar fast-tracked package that will likely exceed $1 trillion before passage. (Trillions are the new billions.) The plan must be sending shivers down the spines of our foreign creditors who are expected to foot the bill. Add this cost to the hundreds of billions of prior stimulus and bailout packages, and the cost to our creditors is quickly heading into the multi-trillion dollar range. It can't be long before they cry uncle and repeat the words of prizefighter Roberto Doran "No Mas."

With so many familiar faces on his new economic team, Obama signaled his intention to "hit the ground running." With the possible exception of Paul Volcker, all of his top appointees share the view of the Bush administration that the root causes of our economic problems lie in the reluctance of banks and other financial institutions to lend. As a result, we can expect a virtual continuance of current policy.

It is no surprise therefore that both Democrats and Republicans offered healthy "huzzahs" to Henry Paulson's latest bazooka: $200 billion to purchase securities backed by auto, student, and credit card loans. It is hoped that with this transference of risk to taxpayers, lending institutions won't be so cautious, and the credit-fueled American economy can thrive anew. This is unalloyed insanity that can only lead to total ruin.

Paulson stated clearly that he would like the Fed to print as much money as it takes to revive the economy. Unfortunately the only industry likely to be revived by such policies is printing itself. But even this will not help the United States as the majority of our printing equipment is imported from Switzerland.

But what if the root of our financial problem is that American consumers have already taken on too much debt? By trying to force feed even more credit down the throats of already overly indebted Americans, Paulson's plan will only weaken the economy further.

Building on the groundwork laid by Paulson, the massive stimuli that will likely be pushed through by Obama and an overly eager Democratic Congress will further impede any real recovery. By swallowing up all available capital, spending to create government jobs will destroy far more private sector jobs. Rather than expanding government and increasing the national debt, policy makers should be thinking about doing the opposite.

The brutal truth that no one in Washington dares acknowledge is that our systemic economic problems can only be solved by a reduction in consumer borrowing and an increase in savings. We must repair our national balance sheet and a painful recession is the only path to achieve this. By interfering with the market's attempts to bring this necessary change about, all the proposals currently coming from Washington or bubbling up from think tanks and Nobel prize-winning economists, will only exacerbate the imbalances and lay the foundation for even greater losses and a larger crisis.

A short-run reduction in GDP is a sacrifice we must be willing to accept. If we swallow this medicine now, in the long run we will have a sustainable rise in GDP as higher savings leads to increased capital investment, greater productivity, and eventually a lasting increase in consumption.

TOPICS: Business/Economy; Editorial; Government
KEYWORDS: aig; bailout; bernanke; bsc; c; citibail; f; financialcrisis; fnm; fre; gm; leh; panicof2008; paulson
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1 posted on 12/06/2008 10:26:30 AM PST by rabscuttle385
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To: PAR35; TigerLikesRooster; bamahead; AndyJackson; Thane_Banquo; nicksaunt; MadLibDisease; ...
2 posted on 12/06/2008 10:28:00 AM PST by rabscuttle385 ("If this be treason, then make the most of it!" —Patrick Henry)
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The Money, Banking, and Financial Markets Ping List.

"Money, not morality, is the principle commerce of civilized nations."
—Thomas Jefferson

FR Keywords: moneylist, bankinglist, financelist

Please tag all relevant threads with the aforementioned keywords.

This can be a very high-volume ping list at times.

Ping list jointly pinged by rabscuttle385 and TigerLikesRooster.

To join the ping list:
FReepmail rabscuttle385 with the subject line add  moneylist.
(Stop getting pings by sending the subject line drop moneylist.)

3 posted on 12/06/2008 10:28:22 AM PST by rabscuttle385 ("If this be treason, then make the most of it!" —Patrick Henry)
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To: rabscuttle385
The free market is being deconstructed before our very eyes. Obama will try and come in and finish the job with his marxist leanings and try and implement a total command economy.


4 posted on 12/06/2008 10:28:55 AM PST by Jeff Head (Freedom is not free...never has been, never will be. (
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To: rabscuttle385

Did you do an FDIC Friday this week that I missed?

5 posted on 12/06/2008 10:31:08 AM PST by PAR35
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To: PAR35

I did. Check your pings.

6 posted on 12/06/2008 10:33:01 AM PST by rabscuttle385 ("If this be treason, then make the most of it!" —Patrick Henry)
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To: rabscuttle385

People who have good credit are ‘deleveraging’ and increasing savings.
Those who have bad credit cannot get a loan.

Is there anything wrong with this picture?

7 posted on 12/06/2008 10:35:30 AM PST by griswold3
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To: rabscuttle385

Along with Ron Paul, Schiff was just about the only one who was right from the beginning about the bailout.

8 posted on 12/06/2008 10:38:49 AM PST by Captain Kirk
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To: rabscuttle385

I would disagree to a small degree.

When competing against government-supported businesses, it is necessary for free market nations to protect themselves through governmental action.

9 posted on 12/06/2008 10:43:22 AM PST by xzins (Retired Army Chaplain, Pro Deo et Patria)
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To: rabscuttle385
I contacted my congress critter:


I will cease buying cars/truckes from any automaker that receives publicly financed bailouts or loans. Let the free market work.
Each one of these companies seeking bailouts needs to cut costs and/or sell assets.


10 posted on 12/06/2008 10:44:26 AM PST by Upstate NY Guy
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To: rabscuttle385; Jeff Head

Here’s some interesting commentary by geologist, Glenn R. Morton that relates to your thread (he also links to a Peter Schiff commentary):

Glenn R. Morton has a B.S in physics and makes a living looking for oil around the world for oil companies. “When I graduated from college with a physics degree, physicists were unemployable since NASA had just laid a bunch of them off... Even after a year, physicists were still unemployable. After six months of looking, I finally found work as a geophysicist working for a seismic company. Within a year, I was processing seismic data for Atlantic Richfield.”
He is currently part of the Society of Exploration Geophysicists, American Association of Petroleum Geologists, European Association of Geoscientists and Engineers, Society of Petroleum Engineers, Society of Physics Students (Sigma Pi Sigma), Society of Petroleum Engineers

Date: Fri, 5 Dec 2008 21:00:57 -0600
From: Glenn Morton
To:The American Scientific Affiliation (ASA) email list:
Subject: $4 gas is here to stay

In July, I saw that the demand for oil was dropping like a rock. I sold out all my oil investments and then after it had fallen by 30%, I thought it was safe to buy back in. Boy was I wrong.

Here is what is happening. The world has NOT found a sudden new supply of oil. The GDPs of the world are plummeting like birds shot out of the sky. For every 10% drop in GDP, oil consumption drops 5 %. That is what the Wall Street Journal says. If that is true, we have dropped 5% in oil consumption. The general feeling is that there is a 2 million bbl/day over supply. This is a measure of how little economic activity is going on; it is not a statement on peak oil

Russia, the world’s largest oil producer is now in permanent decline

“Today the markets know that Russia needs at least $1 trillion in investment if it is to maintain, let alone increase, its oil production. Just five years ago, output was increasing so fast — energy giants Yukos and Sibneft were posting annual production gains of 20% — that even the Saudis were worried about their own global dominance. But in the past year Russian oil production has started to wane. Leonid Fedun, a top official at Lukoil, Russia’s No. 2 oil producer, admitted back in April that national output had peaked and was unlikely to return to 2007 levels “in my lifetime” and that “the period of intense oil production [growth] is over.” Without foreign money and expertise to extract offshore oil and prolong the lifespan of existing wells, Russian production will fall dramatically.” Roger Howard, An Ode to Oil, Wall Street Journal, Nov 29, 2008, p. W2

I would post pictures, but the antiquated asa email list doesn’t allow that, but every economic indicator is really bad.

“The Economic Cycle Research Institute’s Weekly Leading Index, a compilation of such bleeding-edge indicators that has in recent decades been a good gauge of economic turning points, is still sinking. Last week its annualized growth rate dropped to the lowest level in its history, dating back to 1949.” Mark Gongloff, “’Beige’ Report Should Show Even More Red,” Wall Street Journal, Dec 3, 2000, C3

In the 1990 recession the index fell 10 percent. After 911, it fell 11 percent. Today it is down 30%. I have a chart of the median sector of the economy ( a measure some use to monitor the economy). Compared with previous declines, this one is the mother of them.

Note how much the US manufacturing and service sectors have fallen, in the past 2 months.

The page that gif is on says “In response to the downgraded economic outlook, commodity prices-oil in particular-have tumbled (Chart 5). Import price inflation, even when petroleum is excluded, has slowed and price pressures across the board have all but disappeared.”

A BusinessWeek article just published says that the 3rd qtr US GDP fell 0.9% and the 4th qtr is expected to decline 1%. This compares with previous declines in previous recessions. They sound optimistic when they say that. But what they don’t seem to acknowledge the incredible drop in activity. US Factory orders have dropped 5% in October;German factory orders dropped 6.1%. Car sales have frozen up—who needs a new car when they might not have a job? Taiwan’s export orders dropped 12%.

Consider China’s construction. China was the driver behind the rise in many of the commodity prices

” According to Macquarie Securities, China’s construction industry, which accounts for a quarter of fixed asset investment and employs 77 million workers, is expected to contract by 30 percent in 2009, casting doubt on whether China will continue to grow at all. Chief economist for Hong Kong-based Asianomics, Jim Walker, told Bloomberg that China’s growth in 2009 could be down to the zero to 4 percent range, with a 30 percent chance of negative growth.”

Yeah, that is a socialist source.

So, what will happen? I am hanging on to my oil investments, because I know how this works. As prices plummet, exploration is stopped, projects are delayed and fields are shut down. Here are some of the news reports

The credit crunch is going to do some really awful things to the price of oil in the not too distant future. Projects by the bucketload are being delayed or dropped. Here are some of those projects. The first is an example of a Gulf of Mexico field that simply died because of the low price.

“Callon Petroleum Company has decided to suspend operations under way to develop the Entrada Field located on the Garden Banks 782 Block in the deepwater of the Gulf of Mexico. The Entrada Field is owned 50% by a subsidiary of Callon, which is the operator.”

“The Company drilled the GB 782 # 3 well to a total depth of 21,100 feet and the well needs to be sidetracked back toward the original GB 782 #2 discovery well. The significantly higher than expected costs incurred to date and commodity prices which have declined to less than half of their levels when development operations began in mid-2008, has resulted in a serious decline in project economics. After reviewing all of these factors, the Company has decided to suspend development efforts. Under current economic conditions the Company does not anticipate returning to the project.” Callon Suspends Development on Entrada Field in GOM Callon Petroleum Company Friday, November 28, 2008

Some of the contractors are going to have hard times, meaning they will lay people off and the expertise wont be there to find the oil in the future.

“Over the past few weeks, several major oil producers have announced delays of important projects, or have scaled back their expansion plans in the hope that market conditions will help them secure better deals from contractors.

State-owned Saudi Arabian Oil Co. (SOI.YY), or Saudi Aramco, the world’s largest oil company by production, for example, recently reviewed its 900,000-barrel-a-day offshore Manifa oil field expansion. This decision could affect firms like Halliburton Co. (HAL), the world’s second-largest oilfield services company, which won a large three-year contract for that project.

On Nov. 6, ConocoPhillips (COP), the third-largest U.S energy company by market value, and Saudi Aramco officially halted bidding on its 400,000-barrel-a-day refinery at the Yanbu Industrial City, in Saudi Arabia. Both companies cited the uncertainty of the financial markets as the driver of the decision, but analysts saw the delay as a move by both firms to wait and take advantage of lower operating costs.

Royal Dutch Shell PLC (RDSA) also recently said the company would defer to an unspecified date a decision on whether to expand its Canadian oil-sands operation. It said the delay will give overheated costs there time to moderate.” Isabel Ordonez “Lower Oil Prices Give Power to Producers in Contract Talks “ Dow Jones Newswire November 20, 2008

The Sauds are shelving plans to bring new fields on line—no money.

“Saudi Arabian Oil Co., the world’s largest oil company by production, shelved plans to upgrade its aging onshore Dammam oil field at a cost of $1.2 billion amid falling oil prices, people familiar with the plans said.

In a statement emailed on Nov. 22, Saudi Aramco informed companies interested in developing the field that the “requisition has been canceled,” the people told Zawya Dow Jones.” Oliver Klaus, “Saudi Aramco Shelves Plans for $1.2B Dammam Oil Project” Dow Jones News Monday, November 24, 2008

Below I asterisked*** the statement about peak oil may be now because of the credit crisis. Once we get behind the decline curve, we will have a huge problem of catching up.

“In Saudi Arabia, Saudi Aramco is reportedly renegotiating contracts on its $15 billion Manifa project that was originally scheduled to add 900,000 barrels per day in oil production in mid-2011. This action is intended to reduce Saudi Aramco costs, but will increase the likelihood of bankruptcy of its subcontractors and will delay the start date of new production. . . . In the UK, plans had been made for additional underground natural gas storage beneath Portland, Dorset, so as to have more ability to store extra gas for winter and prevent price spikes. This has now been suspended, for lack of funding.”

. “The net impact of all these issues is that oil production has already started to decline. Plans for future investment have been cut back, so it is likely that oil production will stay low for quite some time. ***Even if prices should rebound, lack of credit will limit the ability of the oil supply chain to increase production. For these reasons, world oil production is likely past its peak.”*** Gail the Actuary, “Impact of Credit Crisis on the Energy Industry - Where Are We Now?” The Oil Drum Dec 1, 2008

Don’t count on more oil in the near term. Spending is way down.

LAUREN KRUGEL, “Oilpatch spending plans soften” Dec 1, 2008:

“Petro-Canada said last month that it and its partners in the Fort Hills oilsands development would push a decision on the mining portion of the project into next year and defer its accompanying upgrader indefinitely. It will flesh out the details on Dec. 11.

. . . Canadian Natural Resources (TSX: CNQ) said last month it would spend about half as much next year as it did in 2008, mostly due to construction wrapping up at its Horizon oilsands project. Half of CNQ’s $4-billion 2009 budget has already been committed and the rest is flexible and can be deferred if necessary. In October, Suncor Energy Inc. (TSX: SU) cut its capital spending target for 2009 by a third to $6 billion, with most of that focused on its Voyageur oilsands expansion. Talisman Energy Inc. (TSX: TLM), which earlier this year streamlined its worldwide operations into a handful of core areas, has said it would likely slow down its spending in 2009, but has not yet provided details.”

So, what does this all mean? The world loses 5.6 million bbl/day of production each year simply due to pressure decline in the wells. That means we need to put online 5.6 million bbl/day of new production just to stay even. If the world is over supplied now by 2 million bbl/day, that means that in a year or so with less activity, the supply and demand will be back in balance and the price will skyrocket again. The previous oil price spike found the weakest point in the economy—the mortgages. When it spikes again, it will find the second weakest part of the economy and cause another crash.

I would point out that I have written about oil prices swinging wildly as we go into the future. It is what happened at the very beginning of the oil industry. This article was written for The Oil Drum last year. It predicted that there would be price crashes. This is merely the first of several as oil scarcity drives the economy into the dirt.

I would also point people to an interview a friend just sent me about a guy [Peter Schiff] who has been mocked but was right about subprime and the current market collapse. He sees worse times ahead—save for energy—see the last question in this interview.

And from

Oct 16—a solar panel manufacturer said it won’t build a new plant 200 + US oil rigs will be idled in the 4th quarter—the decline rates on onshore wells is tremendous so this will quickly cause a reduction in supply. Nexen, Value Creation Group, Shell,Suncor have all have delayed upgrades in the tar sands—the estimated break even for Canadian oil sands is $90/bbl

Oct 29, a Thai refiner has delayed a $1.5 billion upgrade to their refinery Nov 4, BG delays an upgrade to Karachaganak field which would have added 40 million bbls per year of additional oil

Nov 5, Sunoco stops an upgrade to the Tulsa Oklahoma Refinery

Nov 6, Conoco and Saudi Aramco deep six an upgrade to a Saudi Refinery

Nov 12 Harvest Energy delays a 1.2 billion dollar Canadian upgrade to a refinery. It would have boosted output by 190,000 BBL/day

Nov 17, BP says it will close its Australian solar panel plant —These things make no money at $60/bbl and even less at $44.


And there are others. Oil is coming back. I am not sure about the economy. While many may have thought me nuts to buy a ranch (even my family thought I was a bit wacked out), the fact is that the high oil prices were the trigger and the mortgages were the bullet in the chamber.

As oil prices went up, people suddenly couldn’t afford their high spending ways. They couldn’t go out to eat, they also couldn’t afford their mortgages and still buy the gas to go to work.

Up where my ranch is, a poor part of Texas, last summer an electrical worker told me that there were lots of people getting their electricity turned off because they had to choose between that and buying gas to go to work. Fun times are ahead. My advice? Get out of debt, buy a ranch.

11 posted on 12/06/2008 10:48:48 AM PST by Matchett-PI (WSJ - Advocate of regular enemas and happy thoughts blames America for Mumbai massacre. (Deepak))
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To: rabscuttle385
I'm so sick of hearing about Auto plant bailouts. Why doesn't anyone step back a moment and look back in time? where did GM come from? Ford? Chrysler?

They themselves were the product of failing auto plants and a depression, where there were once over 57 auto plants, their became only 4.

Well now it's time once again to shake up the bag and see what emerges. Had these companies operated with an eye to the future, they wouldn't be in this position in the first place.

With another $51 billion dollar bill due Dec 2009, when the (notso)"big three" have to cough up that money to pay into employees retirement health care fund, it's pretty obvious that the size of the bailout is going to be much more than the now $40 billion the big three are asking for- which is only to cover the operating expenses for 2009. That's on top of the 25 billion GM has already received for "retooling", which never happened, the money vanishing to bank accounts unknown. We are looking at a 'bailout' of well over 100 billion, with no end in site, while the Unions sit back and take employees dues money and spend it on other political activities, enviromentalism, Marxism, all of which are counter to auto plants even existing. This isn't a bail out, it's a giant rip off. We must NOT fall for the doom and gloom stories of " massive job loss" and let this pig die. Sure there will be a few thousand jobs lost, but the auto parts suppliers will not fold up and blow away, as there are other auto plants that will most certainly expand to fill what void there is left from the big obsolete 3 little pigs that have been sucking the economy dry. Bye bye communist Unions, you stepped far beyond your origional purpose, and created your own death by communism.

12 posted on 12/06/2008 10:55:48 AM PST by Nathan Zachary
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To: rabscuttle385
Unions overplayed their hand to such an extent that this country is now in its death throes. Businesses countered by 1) buying off senators and ramming NAFTA through so they could exit the country without losing their market and 2) making sure the borders weren't enforced so that those businesses that had to stay behind because of high distribution costs could have cheap labor. It's all about wage parity and when auto workers and longshoremen make more than doctors and aerospace engineers, there's a big problem.
13 posted on 12/06/2008 11:07:18 AM PST by Rockitz (NObama 2008- Strange we ain't believin')
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To: Nathan Zachary
let this pig die...

Sounds great!

Sort like a dinosaur BBQ..

At the rate they keep asking for more, more, more, it makes the SNL spoof skit look real.

14 posted on 12/06/2008 11:22:40 AM PST by norraad ("What light!">Blues Brothers)
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To: rabscuttle385
RE “reduction in consumer borrowing and an increase in savings:

How does relate to the theory that economic growth brings in more tax revenues, and can be stimulated by certain types of tax cuts? Obviously not the welfare stimulus giveaways that have become so popular. Certian types of investment tax cuts

15 posted on 12/06/2008 12:10:36 PM PST by sickoflibs (Obama says: "I only need to buy 40% of voters with handouts and trick another 11%")
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To: Rockitz
What nonsense. "buying off senators and ramming NAFTA through so they could exit the country without losing their market"

LMFAO! What market(s)?

Your entire statements says "seal the borders! become the new soviet union!"

16 posted on 12/06/2008 12:52:35 PM PST by Nathan Zachary
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To: norraad

Thank God I bought my ranch and paid off all my debt years ago.
Things just don’t look good.

17 posted on 12/06/2008 1:06:13 PM PST by Nathan Zachary
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To: Upstate NY Guy

Amen to that. This country has lost its way when it becomes the standard to bail out companies that are poorly managed. It happened with the airlines back in 2001/2002 (several were having problems prior to 9/11, but 9/11 was used as an excuse to prop them up). Bailouts don’t force companies to change bad habits and bad management, it just enables them to keep on doing the same.

18 posted on 12/06/2008 3:44:29 PM PST by af_vet_rr
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To: xzins

Impose tariffs on any imports receiving subsidies from their domestic governments.

That will correct the problem (restore market-level prices).

19 posted on 12/06/2008 4:11:02 PM PST by 4Liberty (Discount window +fractional reserve banking = moral hazard + bank corporate welfare + Inflation tax)
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To: 4Liberty

Exactly the same thing I’m thinking, and what the Founders envisioned.

When someone distorts the market, then you try to get them to stop, and if that doesn’t work, then you try your best to counteract it.

20 posted on 12/06/2008 5:17:00 PM PST by xzins (Retired Army Chaplain, Pro Deo et Patria)
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