$1 Trillion Monster Bailout For The Euro!

I'm back!

And am vindicated anew!

Coming back from my self imposed exile away from the miasma of domestic politics, I picked this up from media on my way home; this from the Associated Press,

"We shall defend the euro whatever it takes," EU Commissioner Olli Rehn said after an 11 hour-meeting of EU finance ministers that capped a hectic week of chaotic sparring between panicked governments and aggressive markets." (bold emphasis mine)

It's been long argued on this space that policymakers have the innate proclivity to act towards inflationism. That's because of the following factors: inherent addiction to the printing press (or government spending), policy "triumphalism" (recent gains from interim policies), prevailing economic ideology and short term or "career" oriented policy based decisions.

And the political reaction to last week's meltdown was as clinically precise as we had anticipated.

Whether it is the US, China or the EU, the policy approach have all been similar-throw money at the problem- regardless of the long term consequences of their actions.

And it will be no different even for the newly elected authorities in the Philippines.

More from the AP,

(bold emphasis mine)

"The European Union spearheaded a $1 trillion plan Monday to contain Europe's spreading debt crisis and keep it from tearing the euro currency apart and derailing the global economic recovery.

"Central banks around the world joined the coordinated effort to prop up the euro and repel speculative attacks against Europe's weakest countries. The European Central Bank used what analysts called its "nuclear option" — buying public and private debt to shore up liquidity in "dysfunctional" markets and lower borrowing costs.The U.S. Federal Reserve separately reopened a currency "swap" program to ship billions of dollars overseas, pumping more short-term cash into the financial system...

"Under the three-year plan, the European Commission — the EU's governing body — will make euro60 billion ($75 billion) available while countries from the 16-nation eurozone would promise backing for euro440 billion ($570 billion). The IMF would contribute an additional sum of at least half of the EU's total contribution, or euro250 billion."

So the massive bailout is essentially another redistribution from the real economy to the banking system, and to bank related creditors, as well as governments -the Euro version!

But this time with much of the world participating in the monster bailout via the IMF.

Rest assured that inflationary pressures are not limited to one country or region, but a concerted global action. So while the Fed inflates to protect her domestic banking system, the ECB, EU and the IMF along with everyone else are doing the same. We expect any further problems, say in China, to be met by the same response.

It's good to be back and proven right!

A Policy Of Bailouts Will Increase Their Number

Former President of Federal Reserve Bank of St. Louis, William Poole once accurately observed that ``Everyone knows that a policy of bailouts will increase their number.”

And the addiction to bailouts seem to be snowballing at a very rapid clip.

Following yesterday's passage of the $838 billion stimulus package in the US Senate, the US government through its Treasury Secretary Timothy Geithner announced a far bigger rescue package and "envisions a far greater government role in markets and banks than at any time since the 1930s", reports the New York Times.

And the rescue plan translates to commitment of as much as $2.5 trillion!

Again from the New York Times, ``Administration officials committed to flood the financial system with as much as $2.5 trillion — $350 billion of that coming from the bailout fund and the rest from private investors and the Federal Reserve, making use of its ability to print money."

The $2.5 trillion Geithner plan...

Bloomberg quotes Treasury Secretary Geithner, “Instead of catalyzing recovery, the financial system is working against recovery, at the same time, the recession is putting greater pressure on banks. This is a dangerous dynamic, and we need to arrest it....I want to be candid: this strategy will cost money, involve risk, and take time."

Obviously, the US government's approach in resolving the unsustainable debt problem is to do the same, pile on more debts.

So far, the US government commitments have reached nearly $8.8 trillion and spent $2 trillion according to the New York Times and the Geithner plan and the latest stimulus package should add to this.

Nonetheless all of these government spending will translate to exploding fiscal/budget deficits which the Casey Research team estimates to reach nearly $3 trillion (Investor's Business Daily)

But with bank related losses nearly at $ 6 trillion, according to Robert Reich (RGE Global), ``Goldman Sachs -- not one to exaggerate the overall problem -- recently estimated the total value of troubled U.S. bank assets to be $5.7 trillion", we can expect even MORE taxpayer exposure in the future.

And Prudent Bear's Doug Noland has nailed it in his article (bold highlights mine) , ``The Government Finance Bubble is being called upon to reflate with little assistance from private Credit, while at the same time it is faced with a Deeply Maladjusted Economic Structure still overly dependent upon inflationary Credit expansion. Throwing mega-Trillions at our distorted economy is just asking for trouble.

``It is in this context that I fear that the Trillions of Government Finance spent to save the world from “deflation” will, in the end, require perpetual needs for Trillions more. There will be no kick-starting asset Bubbles or a return of private-sector Credit excess. Instead, it will be a case of throwing repeated doses of government-directed finance/purchasing power at the system. Temporary but fleeting economic boosts will then require only stronger doses of artificial stimulus.

``We’ve commenced a new cycle dominated by government electronic printing presses in all their various forms. The inflationary consequences will be a different variety than we’ve grown accustomed to from previous reflations. But the bottom line is – and there’s ample history to support this view – that once the “printing presses” get humming along it’s going to be darn difficult to slow them down."

Overall, a policy of inflation begets more inflation.

And that's where we are likely headed for. But don't count on a benign outcome.

Why Social Liberals Dominate The Academe?

In the ongoing debate about why the dominance of liberals in the academia, perhaps we find some answers from this Wall Street Journal article (bold highlight mine)….

``With the Big Three seeking a bailout from Washington, the Big Ten are following suit. Earlier this week the Carnegie Corporation of New York took out a two-page ad in the New York Times, signed by executives of 36 public universities, state university systems and higher-education associations, urging Congress and President-elect Obama to rescue them.

``Mr. Obama has already promised to expand federal subsidies to higher education by increasing Pell grants and making student-loan terms more permissive. The university chiefs seek an additional "federal infusion of capital" -- as much as $45 billion -- to build new facilities, especially "green" ones. "To ensure a rapid response, only projects that are shovel-ready or on which construction can begin within 120-180 days should be funded," says the ad.

``The Higher Education Investment Act, as the university chiefs call their proposed bailout, would allow them to make an end run around parsimonious state lawmakers: "The dollars should not be subject to appropriation by state legislatures. Federal funds should be conditional on states' agreement not to use these federal funds as an excuse to reduce budgetary commitments to state universities."

``Yet American higher education might benefit from more parsimony. Economist Richard Vedder has shown that large government subsidies already contribute to making universities "relatively inefficient institutions partly sheltered from the discipline of the market -- a discipline that provides incentives for cost reductions, product improvement, and innovation." The more subsidies rise, the higher tuitions seem to go. If taxpayers are going to shovel out more money to these schools, the academic executives should at least allow outsiders to perform a cost "restructuring."

Inefficient institutions that survive only from government largesse! Essentially you can’t bite the hand that feeds you.

Perhaps another clue can be found from this article… “With economy in shambles, Congress gets a raise” (thehill.com)

``A crumbling economy, more than 2 million constituents who have lost their jobs this year, and congressional demands of CEOs to work for free did not convince lawmakers to freeze their own pay.

``Instead, they will get a $4,700 pay increase, amounting to an additional $2.5 million that taxpayers will spend on congressional salaries, and watchdog groups are not happy about it.

“As lawmakers make a big show of forcing auto executives to accept just $1 a year in salary, they are quietly raiding the vault for their own personal gain,” said Daniel O’Connell, chairman of The Senior Citizens League (TSCL), a non-partisan group. “This money would be much better spent helping the millions of seniors who are living below the poverty line and struggling to keep their heat on this winter.”

``However, at 2.8 percent, the automatic raise that lawmakers receive is only half as large as the 2009 cost of living adjustment of Social Security recipients….

It’s especially nice to get enlisted as part of the government’s bureaucratic network especially when the economy-or the private sector- is in a recession.

Yet this isn't just a US affair as the dominance of liberals in the domestic arena is also apparent. They are frequently quoted by the press or write Op Ed columns for popular broadsheets. These days they write about the need for the so-called "equitable distribution" of land reform.