Is the Bailout Plan Breeding a Greater Crisis?

By Paul Craig Roberts

....This perception of the problem and the “remedies” being applied, might be causing a greater problem for which there is no solution. Obama’s approach, and that of the previous administration, requires massive monetization of debt by the Federal Reserve and massive new debt issues by the Treasury....

Despite the near-term budget costs of ending the occupation of Iraq and the war in Afghanistan, terminating these pointless military adventures would produce immediate large out-year budget savings. Closing many foreign military bases and cutting a gratuitously large military budget would produce more out-year savings.

The Obama administration’s belief that it can continue with Bush’s wars of aggression while it engages in a massive economic bailout indicates a lack of seriousness about America’s predicament.

Rome eventually understood that its imperial frontiers exceeded its resources and pulled back. This realization has yet to dawn on Washington.

More budget savings could come from a different approach to the financial crisis....

Would it be cheaper for government to buy the shares of the banks and AIG at the current low prices than to pour trillions of taxpayers’ dollars into them in an effort to drive up private share prices with public money?....

Could this massive debt issue be avoided if the government took over the banks and netted out the losses between the constituent parts?

A staid socialized financial sector run by civil servants is preferable to the gambling casino of greed-driven, innovative, unregulated capitalism operated by banksters who have caused crisis throughout the world.

Perhaps the Federal Reserve should be socialized as well. The notion of an independent, privately-owned Federal Reserve system was never more than a ruse to get a national bank into place. Once the central bank is part of the state-owned banking system, the government can create money without having to accumulate a massive public debt that saddles taxpayers’ and future budgets with hundreds of billions of dollars in annual interest payments....

If the Obama administration can think about socializing health care as a single-payer system, it should be able to think about socializing the banking system....

The Bush/Obama approach to the crisis in the financial sector is to monetize existing debt and to accumulate massive new debt that will likely also require monetization.

The monetization threatens inflation, high interest rates, and depreciation of the US dollar and loss of its reserve currency role. The accumulation of new public debt implies larger annual interest payments that could make future deficit reduction problematic.

Clearly, the Obama administration needs to broaden its perception of the predicament to which financial deregulation and offshoring have brought the US economy.

Dr. Roberts was Assistant Secretary of the Treasury for Economic Policy and Associate Editor of the Wall Street Journal. He has had numerous academic appointments.

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