The 2008 Bailout: Why it won’t happen one more time.
You might feel like the problem has passed, but in 2008, the US experienced only the tremors of a great and forthcoming economic collapse. Since then, Americans have been living in an economic depression the likes of which have not been seen for over 70 years, but which is only an opening tremor in comparison to the coming devastation of a coming huge economic earthquake. Although the major media outlets in cooperation with the federal government continue to report the overall economic situation to be recovering, no such thing is either possible or is really happening at all.
We are actually NOW in the midst of a severe economic depression,
and the crash has not yet come to a conclusion. 2008 was only the beginning.
The 2008/2009 Bailout of the Major Banks – What happened?
Beginning in 2008, Goldman-Sachs, JP Morgan, Morgan Stanley, Lehmann, Citibank, and Bank of America, among a few others, all suffered conditions of insolvency that would have put them completely out of business were it not for the bailouts that arrived at the last moment from the Federal Reserve, and from a number of other related federal banking agencies. Here’s what happened in a nutshell.
A sudden burst in the real estate bubble caused millions of mortgages to be instantaneously over- valued. Consequently millions of American mortgages began to go into foreclosure. Foreclosures in large quantities are bad for banks because they create an instant cash shortage. A huge drop in incoming mortgage payments compounded by the problem of needing to shed massive amounts of over evaluated property at a loss, meant that the business of loaning money could not go on unless there were simply more capital on hand.
Federal Reserve to the rescue?
The Fed stepped in and fixed numerous bank insolvency threats by supplying huge amounts of cash to major banks. The problem was, the Fed itself didn’t really have the money to solve this crisis either. Sure, they had a few tens of billions of dollars in the reserve, but what they needed was tens of TRILLIONS of dollars! Everyone seems to believe that the Fed always does and always will have cash on hand, but the fact is that Fed had to play some serious games to “create” the money needed to keep these major banks from going under in 2008.
Where the Fed Got the Bailout Money: Borrowing and Printing, Borrowing and Printing, Borrowing and Printing
The bottom line is that the money for the bailouts was created by just playing more dancing around and switcharoo games. The first thing the Fed did was to print about 4 trillion dollars, which make up the reserves that most US banks are still using to operate on. BUT….. that wasn’t nearly enough to handle this emergency!
So, the second thing the Federal Reserve did was to call up the European Central Bank (ECB) and cry “Help!”. Here is what they did with what they had to work with, after having printed as many trillion dollars as they could risk without creating unmanageable inflation.
The European Central Bank had a significant amount of dollar liabilities, owing at that time several trillion dollars to the US money market. So, the Fed effectively asked them to cough up as much of their debt as possible, and to do it immediately! They came up with around 13 trillion dollars. Of course they didn’t have the dollars on hand to pay out, nor did they have enough Euros lying around in their own reserve to fill the Fed’s need. But since the ECB can print Euros, they did, and then they swapped newly printed Euros for newly printed dollars from the Fed, both of them backed by nothing. That is what was then supplied to fund the Federal Reserve.
Consequently this problem also affected the European money market too. Euros also had to be printed out of thin air. Contrary to popular belief, you can’t just print massive amounts of un-backed currency without inflationary effects. We’re talking about trillions of dollars and trillions of Euros, so it’s hard to imagine that solving the Fed’s problem with fresh crisp currency didn’t also have some negative impact on the value of the Euro. But it worked, sort of. It was a well calculated risk, and neither the US economy nor the European economy suffered its final crash as a result.
And what to do when the next emergency arises?
So, will the ECB still be able to continue to prop up the Federal Reserve the next time it has another unsolvable insolvency problem? It’s highly unlikely. Because the Fed continues to do business as usual, and because it has now reached the point of not generating enough revenue to pay even the interest on all of its own debts, an even bigger crash is assuredly coming.
Why the dollar WILL crash.
This time the crash will be based upon a sudden and complete loss of world confidence in the dollar. The world is quite aware of the financial perils of the Federal Reserve. It’s credit rating is bad now. When that lack of confidence causes the market for Treasury Bills and bonds to completely die, the Fed will lose its ability to inject any more cash into our system from other systems by just borrowing it. Lacking any other real significant source of income, its only remaining alternative will be to print more and more and more pure counterfeit currency. The result will be hyper-inflation.
Next time they’ll need MORE than mere tens of trillions!
Today the Federal Reserve is falsely looked upon as the hero of 2008 because of its quick thinking that resulted in finding a convenient solution with the European bank. The truth is that the Fed itself caused the very crash they managed to bail us out of with the help of the European Bank.
In the next and probably final crash, it won’t just be tens of trillions that will be needed. The size and volume of the losses that would be caused by hyper-inflation of the dollar would be far more than the ECB could possibly swallow.To implement another solution like that of 2008 would drag the Euro right down with the dollar.
Fasten your seat belts. You may think the ride is smooth now, but the ride ahead will not be. Read more about this topic at Jim Rickards’ blog.