How to bail out the states

I just saw an article where California was able to secure $5.4 billion in loans from 8 different banks, led by Goldman Sachs.

Why is this important?  California is out of money.  And yet they refuse to cut their spending.  So the only way they can continue to spend this kind of money is to borrow it since the states do not have their own printing press.

But this money that is being loaned to California is money that was given to the banks as part of the Federal Reserve’s money printing program.  Since California will probably never pay this loan back, the Federal Reserve has in effect printed money for the State of California.

I was wondering how the federal government was going to bail out the states that have overspent.  And this appears to be how they are going to do it.  And they did it in such a way that the vast majority of the people will never figure out that it was a bailout.

The First Domino

It seems to me a lot of Americans aren’t taking the Greek situation seriously.  After all, it is another country, half way across the world, how can it actually affect us.

What people don’t realize is that the banking system is a global banking system.  All of the banks around the world are tied together.  Who do you think owns all of this Greek debt?

Unfortunately U.S. banks own a large percentage of it.  European banks own a lot as well.  And even China has a pretty large stake in it.  If Greek fails, that is likely to cause banks throughout Europe, the U.S. and Asia to fail as well.

First Greek fails to pay back a European bank.  That causes that bank to be unable to make their payments to a U.S. bank.  That causes the U.S. bank to be unable to make their payment to China.  And so on.

It is lined up like dominos and once the first one falls, the others will be right behind it.  If Greece goes under, the entire global financial system will be right behind it.  This is why so many countries are fighting so hard to keep Greece afloat.

And it is something Americans should take very seriously.

However, as we have already seen, bailing out Greece doesn’t work.  They were already bailed out once, and here they are now needing more money again.  All they can hope to do is give Greece enough money that they can keep them afloat for a little while and hope that a miracle will occur somewhere.

That miracle is that one of these countries is going to have to cut their spending so dramatically that they can actually begin to pay down some of their debt.  It doesn’t appear that is going to happen, either in Europe or the United States.

It’s just a question of time before somebody defaults and the dominos begin to fall.

Richard Fisher's Speech

Yesterday, the Round Rock Chamber of Commerce hosted their monthly meeting by having Richard Fisher, the President of the Dallas Federal Reserve Bank and a member of the Federal Open Market Committee (which sets Fed monetary policy) as a speaker.  I was in attendance.

In his speech, Mr. Fisher said that the economy is on the path to recovery and he would not be surprised if GDP (Growth Domestic Product, which measures the U.S. economic productivity) growth was as high as 4% in the last half of the year.

Personally I don’t see this.  Mr. Fisher admitted that the Fed had provided plenty of liquidity to the system.  That banks had plenty of money to loan out, but loans weren’t occurring due to too many unknowns for businesses.  But as some of these things settled down, then economic activity should pick up.  He admitted that our economic activity is 70% consumption, so basically he is saying consumption should pick up.

If consumption picks up, then business will want to hire more.  Thus reducing unemployment and causing both consumers and businesses to want to borrow more.

Again I don’t see this.  What I see is that baby boomers are getting older and more and more are reaching retirement age.  When people retire, they spend less.  Also the financial crisis has caused many people to realize they need to get their own finances in order.  As a whole, the country is paying down its credit card and automobile debts and spending less.

Plus a whole lot of people are removed from the credit system due to foreclosures or personal bankruptcies or just due to increased lending standards.

I simply don’t see consumption going up, therefore I don’t see any increase in lending or any increase economic productivity occurring.  My prediction is that GDP will be lower the next 6 months.  This prediction, of course, is based on the Federal Reserve not printing more money and artificially inflating all of our numbers including GDP numbers.  Unfortunately I have to present that caveat because I think that is what is most likely to occur.

Anyway his speech left me wondering.  Can the Fed not analyze the same way I do?  Do they lack the same information that I have?  Or do they have some other agenda that would cause them to misrepresent this information?

Richard Fisher is a very intelligent man.  He went to Harvard and to Stanford.  I’m sure he can analyze data as well as me.  It’s hard to believe they don’t have the information as I’m not privy to near the information they have access to.  Nor do I have the research manpower that they have.

Therefore I can only conclude that they know what is the truth, but have some other agenda.

Of course, they will just tell you that I can’t analyze data accurately.  And that I simply don’t understand.

We shall see.