The Fed and Foreign Firms

Shockingly, it has been revealed that in 2008 and 2009, the Federal Reserve (Fed) not only bailed out U.S. banks, but it also supported many non-banks and many foreign banks.  It is not shocking that it happened (for anyone paying attention), but it is shocking that it was actually revealed.

Of course, during the time, we heard cries from Bush, Paulson, and all of the other establishment figures in DC, telling us that we had to have a bailout or we could see the whole system collapse.  Due to the threat of a run on banks, there was a slight element of truth to what was being said.  After all, a run on the banks could have collapsed the banking system (because of the severe fractional reserve lending and the bad loans that had been made by banks) and then it would have been left to the FDIC to pay the bill.  Since the FDIC wouldn't have been able to cover 1% of the total deposits necessary, then it would have been bailed out by the Fed.  From a libertarian standpoint, we will address this issue at a later time, but I am just pointing out that there was a slight element of truth of what was being said by the establishment.  They weren't specifically talking about bank runs very much, but that really was a threat.

With all of that said, most of the bailout was a total fraud.  It was obvious then for anyone who knows how the government operates, but this latest story reveals just what a fraud it was.  The Fed was bailing out companies like Verizon, Harley Davidson, and Toyota.  We already knew that it bailed out GM and Chrysler.  These bailouts have almost nothing to do with the banking system and a possible financial collapse.  It is simple favoritism.  It is corporatism.  It is fascism.  It is almost everything but capitalism.

By propping up these companies, the government is wasting resources.  Whether it is through loans or straight subsidies, the government is taking private money (whether through taxes or inflation) and it is directing this money to failure.  It is misallocating resources on a grand scale.  This money could have been used towards profitable companies or towards savings and investment.  This money should have been allocated by the billions of individuals that owned it.  Every person and entity that has U.S. dollars in their possession was ripped off by this.

Not only is this a waste of resources and will mean a lower standard of living because of a decrease in savings and investment, it will also have to be corrected.  The Fed has delayed the correction process.  In the future, these resources will have to be directed by the free market to their proper place.  They will shift from failed companies to profitable ones.  This will take time and pain, but the correction is necessary.

The government and the Fed keep making things worse.  They are delaying the inevitable and the correction will be worse for it.  Be prepared for interesting times ahead.