Bailout for Wall Street? Hell No! Here's Why.

We've been told a lot in the last week about the financial catastrophe.  If we don't do something now, the sky will fall.  The world will end.  We will all be poor and homeless. Aliens will descend onto Planet Earth and demand cavity searches to find our brains. They might actually find some brains, depending on which cavity they search on certain politicians.

The fact is this; there is no way to bail out Wall Street without it coming back to royally screw the taxpayer.  Period.  This is going to hurt either way we do it.  The question is which is the wisest way to do it?  Now I'll be the first to admit, I'm no expert when it comes to the economy, so John McCain and I share something in common.  I know, I'm pretty surprised about that myself.  But I know the following facts:

• The Federal Government is over $9 Trillion Dollars in debt, mostly to foreign countries.
• Last year we paid $406 Billion in interest, not Principal, on that debt.
• The Federal Government brought in $2.56 Trillion in total revenues.
• They spent $2.73 Trillion in Government spending.
• The Government is broke, and has negative cash flow.
• We don't have $700 Billion to give to Wall Street, or even to loan to it.
• The Government is insolvent.

Now, knowing these facts, your probably asking yourself the same thing I asked myself. What the hell are we doing?  Well, the Federal Government is gearing up to do exactly the same thing that got us into this mess in the first place, and that is to prop up an insanely overvalued market, privatize the gains and socialize the losses.

The housing market largely failed for two major reasons.  The Federal Government allowed big lenders like the Federally chartered Fannie Mae and Freddie Mac to relax requirements to get mortgages so that more people could buy houses.  The private lenders followed in suit to compete.  This allowed people who should've never been making huge financial commitments to get into homes they couldn't afford.  That was the first mistake.  The second mistake is that the valuation of homes and what they were worth had reached the highest mark of insanity.  Some homes had, on paper, increased in value 100% over the last 4 years.  Where those homes really worth that much?  No.  They weren't. It created two more problems, and those were that since counties were reappraising homes at such huge values that it drove up property taxes on those homes.  That strained the homeowner who already couldn't really afford their mortgage in the first place.  That caused tax foreclosures and the banks took the hit for it.  Secondly, it caused people who just had to have a home to get one for such a huge amount of money that they couldn't afford it.  So the big lenders came up with fancy loans, like adjustable rate mortgages, interest only loans, non-amortization loans (where the principal never goes down, only up), and so on.  

These problems built a house of cards that was doomed to fall.  Now what the Federal Government is doing, along with the Federal Reserve (which is actually private bank with a Federal charter) and Treasury, is to buy up this toxic mortgage debt and homes in hopes of one day being able to turn around and sell it at a profit.  That will never happen unless the housing market returns to the insane prices we saw prior to the bubble busting, and we all now know what happens when that occurs.  Do you see the vicious cycle yet?  I do, and it scares the living bejesus out of me.  It's beyond stupid. This is clinical insanity at it's best.

To bailout these Wall Street firms, we will have to borrow that $700 Billion from other countries, and raise our national debt ceiling to make room for it.  But the kicker is that it will cost far more than $700 Billion.  When you figure in the interest we'll end up paying on it along with our already unbelievable amount of debt, the costs of brokering such loans for our Government (which will cost billions of dollars and be done by the same brokers that got us into this mess), and the devaluation of our dollar as a result of inflation caused by this debt overshadowing our currency, the total amount of money that will end up being spent on this bailout is astronomical. The reason the politicians aren't talking about these facts is because they know it will gain no support from the taxpayers, and they feel helpless to do anything else. They also want to not piss off their super rich campaign contributors who have far more to lose than you and I if they decide to not bail out Wall Street.  In addition, they don't want to talk about the hyperinflation of the dollar that this could cause, which would essentially steal money from everybody since it will reduce our dollar's value, especially in the global market.  The fact is that once our dollar crumbles, so does the foundation of our society.  It wasn't war that brought Rome to it's knees.  It was the fact that it's currency became essentially worthless.  The paper it's printed on ends up being worth more than the number printed on it.  

If you need a good example of hyperinflation, the most well-known was the great German hyperinflation of the 1920s, when the monthly inflation rate peaked at approximately 30,000% in October 1923.  Back then, if it normally cost 1 mark to buy a loaf of bread, you'd have to pay $30,000 marks at it's hyperinflated rate.  If you think this couldn't happen to America, think again.  Our dollar is currently only worth 5 cents to the Dollar of 1913.  Now you really know why old people can be extremely grumpy.  Think of every dollar you have as being a share in a company, and it's worth a certain amount.  Your stock is essentially your savings and your retirement funds. Now imagine what happens when this company crashes, and wipes out the value of your shares.  You've lost your savings, and there is nothing anyone can do about it. Welcome to the wonderful world of fractional reserve banking and fiat currency! Yay! Isn't this so much fun?  It is if your a sadist.  This is the threat of inflation, government overspending, debt, and printing money out of thin air.

Overall, there is not going to be any easy way to get out of this, but propping up a housing market that was way overvalued will just prolonging what could be a 1-2 year recession and turning it into a decade long depression.  If we were to take a sanity pill and accept that our valuations of homes were a false reality and let the market adjust and recover on it's own, this problem will work itself out in a year or two, and not put the cost in the laps of taxpayers for generations to come.  It's going to be painful. Make no bones about it.  There will probably be a few more major bank failures and people will invariably lose their homes and the equity they invested in them.  It's tough luck, but this is what happens when you gamble and make bad decisions.  It will claim many innocent victims that weren't educated about what sort of loan they were getting when they signed the dotted line.  This is where homeowners and the lenders need to take personal responsibility, and accept the lumps they will be dealt in consequence.

To summarize, we can either accept reality, or continue to prop up a market that was a pipe dream.  We can weather out this financial hangover sober, or we can decide to keep cracking open cold ones and stay drunk as a means of not facing the inevitable.