The Great Depression Online

Great Depression Online Archive Issue:

The Big Bailout of 2008

Great Depression Online
Long Beach, CA
October 21, 2008

Inside This Issue You Will Discover…

*** Who’s to Blame?
*** A Bad Idea
*** The Asset for All Seasons
*** And More

[Editors note: Over the past several months we’ve received a slew of emails offering observation and opinions of who’s culpable for the financial crisis.  In today’s GDO issue we offer a guest essay by Michael Kosares, President and Founder of USAGOLD-Centennial Precious Metals, Inc., which gets to the fact of the matter while offering some essential insights.  Enjoy!  M.N. Gordon]

The Big Bailout of 2008
By Michael Kosares

There has been a great deal of finger-pointing going on.

Who is to blame for this extraordinary crisis?  Arguably, it is the most personal of the many crises visited upon us in my lifetime and probably the most far-reaching since, as of this morning [October 15, 2008], it had engulfed most of the world. Congress and the American people are looking for a "villain" or "villains" -- someone or some group that can be tagged with the blame for what has happened to the world economy.  Wall Street's investment bankers rank high on that list.  Driven by greed, they couldn't have cared less about the corporations which employed them and the customers who sustained them. Government, and central banks, come in a close second. Regulators failed to do their jobs and the central banks simply fed the credit bubble without regard to the consequences. Others tag individuals like Alan Greenspan, Ben Bernanke and George Bush.  I could go on with the various candidates in the blame game but it diverts me from my point.

The fact of the matter is none of this really hits the mark. The real culprit is an idea -- a bad idea, one that has gripped the advanced societies since the introduction of Franklin Roosevelt's New Deal, the federal government's response to the Great Depression.  The words which encompass that idea most closely are "moral hazard."  When we hear those words we immediately think of the Wall Street financial houses and funds in their relationship with the government.  What we do not generally compute is that moral hazard applies to the rest of us as well.

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Moral hazard is the state of mind created by a belief that the government is going to bail us out if something goes wrong -- in our lives, in our economy.  How many of us assessed the spreading damage of the credit crisis and said to ourselves, "the government will step in and take care of it"?  How many of us believe that the government will somehow bail us out personally, or as a society, when things go bad?

The answer to that question is "almost all of us."  And this goes for Wall Street's masters of the universe as well.  It should not escape our notice that when the chairman of Lehman assigned blame in Congressional testimony yesterday, he noted that his firm did not get the same bailout that others did.  In other words, if only the government had stepped in, Lehman wouldn't have collapsed and the hearings being conducted yesterday would have been unnecessary.

But you see, this whole idea of personal and public bailouts is what is behind the problem in the first place.  As long as institutional man believes that the government stands behind him no matter what level of risk is taken, the level of risk will rise to the point failure is imminent.  Why not swing for the fences?  Win and you take home the prize.  Lose and the government covers the losses.  Such a philosophy makes for bad decisions.  We have seen the net result of such thinking over the past several months, and it isn't pretty.  It is what led millions to take on mortgages they couldn't afford; it is what drove Wall Street to take risks it couldn't possibly cover.

As for individuals, over the past few weeks, as the crisis went into high gear, in my daily travels I heard over and over again "How could this be happening?  This is crazy.  I have never seen anything like this."  The prevailing attitude was one of disbelief.  That somehow, someone, somewhere should have seen this coming and headed it off; that is, made sure it didn't affect the rest of us.  When Congress failed the first time to pass the TARP legislation (which is probably the biggest underwriting of the moral hazard mindset since the Roosevelt administration,) most could not believe that they hadn't passed the legislation.  After all wasn't "this sucker going down" if we didn't (as our president so succinctly put it)?

So you see, my friends, it is an idea which got us here, not an individual or group of individuals.  And it is this same idea which has driven this government to the next level of socialist engineering, and driven us deeper into the socialist embrace. In the end it comes down to a question of honor, morals and ethics -- our institutional approach to the human condition. As a society, we can encourage bad behavior or we can discourage it.  We have chosen to encourage it.  Politically, in our desperation to help, we only hurt, because we damage our own characters.

So the road to the big bailout of 2008 is paved with an idea -- the idea that we don't have to be 100% responsible for our lives, or our institutions, because a great safety net lies below us.  It is a breeding ground for bad decisions, and it doesn't end here with the big bailout of 2008.  As I said in my earlier essay, this is more of a beginning than it is an end.

I have hinted at this human aspect to the economic predicament over the years, and attempted to explain that there is no perfect economic system, just as there is no perfect human institution and, certainly, no perfect human being.  And that is where gold comes into the picture.

Gold is the remedy when things go awry simply because it is the one primary asset that remains fundamentally detached from the political economy.  At the same time, it still serves its holder as a usable, identifiable and valuable asset within that system.  That sentiment has caught hold globally and in America over the years, and even moreso over the past year as the smoldering heat underneath the world economy achieved full combustion.  Some have taken to heart my message on gold, and they have done well as a result.  Better put, gold has done for them what it is billed as doing -- helped them ride out the storm.

There is a message in that which should be taken to heart by those who do not own gold.  If you think that gold's best days are over, then you don't completely understand why gold should be owned in the first place.  It is still, first and foremost, an insurance policy against events like the ones which have occurred over the past several weeks.  It is not, in the first instance, an investment.

America's chickens have indeed come home to roost, and with a nasty vengeance (as they have, we learn this morning, elsewhere).  The government, in response, has gunned the engines of the money making machine, and created a new bureaucracy to deal with its toxic waste.  Unfortunately, there are those who will be blinded by the bright lights of the government rescue and come to believe that the worst is over.  They will make their financial plans accordingly.  That, in my view is a mistake.

The worst is not over, and it is not over because the ultimate causes of the problems which launched the meltdown have not been restrained.  In fact they have been radically unleashed with perhaps even deeper consequences, including the looming possibility of a runaway stagflation.

If you take one thought with you from this short essay, let it be this: As long as the sort of thinking described above persists, gold will remain the asset for all seasons, all economies, all possible misadventures.  Richard Nixon, upon detaching the dollar from gold and letting it float in 1971, famously proclaimed "we are all Keynesians now."  He knew running deficits and underwriting what we have come to call "moral hazard" would now have no deterrent.  Would he say, after these past ten days events, that "we are all Socialists now?"

If so, a stronger case could not be made for gold.  As one astute London trader put it many years ago: "Gold is bedrock."


Michael Kosares, President and Founder
USAGOLD-Centennial Precious Metals, Inc.

P.S.  With over 35 years in the gold business, owner and founder of USAGOLD-Centennial Precious Metals, Inc., Michael Kosares, is a highly-respected member of the gold fraternity internationally and a well-known expert in the field of gold, notably for his on-going commentary on the gold market and its economic, political and financial underpinnings. He is the author of the widely read book, The ABCs of Gold Investing: How to Protect and Build Your Wealth With Gold; and has been interviewed for a wide assortment of financial publications including the Wall Street Journal and Barron's.  If you would like to read more of Michael’s on-going commentary, be sure to join The USAGOLD NewsGroup at: The USAGOLD NewsGroup.

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