Ron Paul has been warning, for years, about just the sort of credit crisis we are seeing now.

Has Warren Buffett, Paul Volcker, or Bill Gross been talking about the risks our fiat money system and loose credit conditions were creating?

Why should I now listen to your so-called "experts" when they weren't smart enough to see this coming?

There is a large group of non-Keynesian economists out there, those from the Austrian School of Economics, who understand exactly what is happening. They saw this coming; they know what the best solutions are.

You can continue to hold to your "mystical-mumbo-jumbo-Keynesian-fiat-money" b*ll *****, or you can get with the program and start thinking rationally about economics.

"Credit" is not "money."

"Wealth" is not created when more money is "printed."

When people ignore those truths and create fictions of "wealth" sustained by nothing more than credit, such delusions cannot be sustained forever.

Reality has arrived; it is time to pay the bill.

Those who ran up the tab, have left the party and have dumped the costs for their party on the rest of us. The defeat of the $700 billion bailout package is just one small (and probably only temporary) victory attempting to force those who ran up the expenses, to actually have to be responsible for their actions.

Credit crisis is limited to the mega banks and any others that were foolish in the first place. I am a senior lending officer of a community bank in Texas and I can assure you we are lending money and it is business as usual. There are thousands of banks across the country that kept to the basics of sound business and today they are in a position gain market share because they avoided the avarice and greed!

Hell, wasn't he the guy who last week sunk $5B into Goldman-Sachs, then vocalized his prayers for a bailout?

I think Buffet's stinging a little right about now.

Will your community bank extend to Hollywood? I'm looking at a lot of studios and studio support who might have their credit line cut off...

But how much can you expand your loan book? Can you grow it +50%? Last figures I saw, credit unions have appx 6% market share nationally. So if all credit unions increase their loan book +50%, that only offsets a -3% contraction in lending by the rest of the banks. One Citigroup going under would reduce US lending by more than all the credit unions in the country put together.

Yes, a few people will benefit from this. Bankruptcy lawyers are very happy too. Doesn't mean the country as a whole won't suffer, a lot.

Just like the advertising campaign; "Spend all you want - we'll print more!"

Dorito conspiracy? We're onto something here...

Gross has been quite vocal. Go read the archives of his monthly investment outlooks, they are very interesting. An example from May 2005 (wherein he rails on "the bare bottomed king".

It isn’t prudent for U.S. citizens to continue to expect to consume 6% more than they produce, nor is it rational for investors to expect foreign central banks – primarily the Chinese and Japanese – to invest that 6% surplus and other direct investment monies into the U.S. Treasury market forever. At some point it comes undone, either through a massive revaluation and dollar decline, a Treasury buyer’s boycott, or a whimpering U.S. consumer beaten down by the cost and/or amount of their burgeoning leverage – much of which is housing related.

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2005/IO+May-June+2005.htm Go to the bottom for a link to archived comments.

Gross is in the business of managing $1 trillion in pension and mutual fund money, so he obviously has to be careful how he says things. He can't scream that the sky is falling - but he knows more about the debt and credit markets than anyone, and he's done his best to warn.

There is no handy archive of Buffett's comments, but he has been warning about the US national debt, the derivatives market, and excessive leverage for years. From a March 2005 article discussing his views:

But the consequences are still dire, Buffett believes. If current trends continue, a decade from now, just at the time when we'll need every dollar to pay for the retirement benefits of baby boomers, the United States will be sending 3% of its current annual output to the rest of the world as interest on the debt run up by its past consumption.

That royalty would run forever, unless we export more and consume less. And given the way global trade policies work, Buffett concludes, massively expanding U.S. exports isn't likely. Hence paying off this royalty would require a huge decline in U.S. consumption, Buffett says, with all sorts of nasty consequences for the global economy and the lives of U.S. workers and retirees. Don't pay it off and the already-projected squeeze on such frills as health care and education spending just gets worse.

Similarly, you have to dig to find Vockler's warnings, but here is an example, also from 2005:

If we can believe the numbers, personal savings in the United States have practically disappeared.

To be sure, businesses have begun to rebuild their financial reserves. But in the space of a few years, the federal deficit has come to offset that source of national savings.

We are buying a lot of housing at rising prices, but home ownership has become a vehicle for borrowing as much as a source of financial security. As a nation we are consuming and investing about 6 percent more than we are producing.

What holds it all together is a massive and growing flow of capital from abroad, running to more than $2 billion every working day, and growing. There is no sense of strain. As a nation we don't consciously borrow or beg. We aren't even offering attractive interest rates, nor do we have to offer our creditors protection against the risk of a declining dollar.

Most of the time, it has been private capital that has freely flowed into our markets from abroad -- where better to invest in an uncertain world, the refrain has gone, than the United States?

More recently, we've become more dependent on foreign central banks, particularly in China and Japan and elsewhere in East Asia.

It's all quite comfortable for us. We fill our shops and our garages with goods from abroad, and the competition has been a powerful restraint on our internal prices. It's surely helped keep interest rates exceptionally low despite our vanishing savings and rapid growth.

And it's comfortable for our trading partners and for those supplying the capital. Some, such as China, depend heavily on our expanding domestic markets. And for the most part, the central banks of the emerging world have been willing to hold more and more dollars, which are, after all, the closest thing the world has to a truly international currency.

The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.

I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.

http://www.washingtonpost.com/wp-dyn/articles/A38725-2005Apr8.html

So, these guys are not johnny-come-latelies, or some talkative legislator - they are extremely knowledgeable and have been deeply involved in the financial markets for decades.

Seriously...he and JP Morgan were hoping for the bailout. JP Morgan bought 2 institutions which held lots of assets but also lots of these 'problem securities.'

Had the government taken those securities off their hands, those purchases would likely look quite a bit nicer.

Yes, there is. Those trillions are too risk-averse to buy illiquid securities and hold them for an uncertain long run return. Their job is to make the maximum profit with minimum risk, which means they would be happy to let the financial system fall apart and buy assets out of bankruptcy for 10 cents on the dollar. They have no interest in helping the country avoid a financial or economic crisis, no matter how much harm people will suffer.

Sorry to offend you. My information and views come from working in the markets. I have a pretty fair understanding of what is happening and the range of likely outcomes, though I can not predict the specific outcome.

As distasteful as it is to admit...Jyl is right. A bailout in some form will...and must happen. Give it until the end of the week.

John:

You do not offend me. I have been an active participant as an investor in the public equity markets for quite a while, but probably do have less experience than you as an "insider".

I just spent about an hour on the phone with my Dad, who is absolutely wiser and more experienced than I regarding this current crisis; his views are more closely aligned with yours.

He explained things in a way that convinced me that even today's failed proposal is better than a laissez faire approach. FWIW, I was not against any bailout, just the one proposed in bill up for vote today. But, you may call me a "flip flopper" on my initial thoughts.

He basically said that mark to market requirements would continue to force banks to take hits on bad mortgages and squeeze them (banks) to failure. He said the FDIC will continue to be forced to cover deposits by law and will end up paying out billions upon billions of dollars after the banks are dead; he predicts that if nothing is done, over half of the top 50 US banks will probably fail.

As I think you stated earlier, the bank failures take out the good borrowers with the bad. Good businesses (via credit lines of which the failed bank could walk away from) and projects relying on debt would be stopped in their tracks.

His point is that it is better to pay those billions up front while the banking system is still functioning instead of after, via depositor insurance, when the banks are out of business. The Fed is going to have to provide the money either way.

This makes perfect sense to me and I generally concede the debate to you.

I would like to see systemic issues addressed, but it sure looks like almost any type of bailout that saves banks is preferable to a collapse of the financial system and the subsequent huge back-side costs via FDIC.

I do have philosophical problems with the large role of the Fed in this instance, but cannot think of any superior alternatives.

Best,

Your argument for this bailout is not surprising, it sounds like you have a vested interest in seeing the "house of cards" being kept propped up.

For those who are looking to understand why any bailout is wrong -- and a bad thing for the economy -- consider:

Imagine a small town with a bank.

Imagine if the banker began making irresponsible loans to people in that town, with no regard to protecting the depositors' money in that bank.

People with little to no ability to repay their loans would receive credit, go out into the town and spend those dollars they had received.

Such a town would experience an economic "boom" from the easy (irresponsible) credit. A lot of people in that town would begin feeling quite wealthy due to all the economic activity. Many of those who sold goods would keep the money they received for those goods as deposits in the bank -- and would feel wealthy when they looked at their bank balances.

Eventually the banker's irresponsibility would catch up with him and his bank would become insolvent since many of those who borrowed money would not be paying it back.

Now imagine that this banker, not wanting to be exposed for the "fraud" that he was (in making all the irresponsible loans), going to the Town Council and telling them, "If you don't buy all these bad loans, there are going to be dire consequences for our town's economy."

The banker's warning about dire consequences is 100% accurate, but do you think the best course of action for the Town Council is to buy the bad loans and effectively "bail out" the banker from the situation he -- and his irresponsible borrowers -- created?

Isn't it better to let the failures take place and let the banker be exposed for his irresponsible (or corrupt) actions? Isn't it better to let those who profited from the boom suffer losses rather than attempt to spread the losses to everyone in the town?

Why should it be any different in our economy overall?

The bankers, including the Federal Reserve -- and especially those in the area of "investment banking" -- have been engaging in irresponsible and corrupt lending. The "house of cards" they have created is now collapsing.

There is no way around it: There will be dire consequences through out the economy.

No "bailout" is going to stop the consequences from the irresponsible lending (and gambling) the banking industry has engaged in.

All that any bailout will do -- especially when it is a bailout proposed by those who created the mess -- is to provide cover for the precise people who are responsible for creating the problems.

A government bailout will not erase any of the damage our economy will experience. All that a government bailout will do is spread the damage to everyone rather than keeping it more closely tied to the people who created the mess.

Let the collapse occur. It will be painful for all of us, but if the collapse is allowed to take place without any "banker-created, government-mandated intervention," those who are most responsible for creating the mess will suffer the worst.

Let those who are most responsible, suffer the most!

My interest, personal and professional, is that the US economy does not fall into a very severe, prolonged recession, or worse.

95% of people in this country probably have the same vested interest.

Then there's people like you.

Right. Kind-of late for that, after all the damage has been done. (My first writing, arguing for sound money policies, was in the 1980s. How long have you been making arguments for a sound U.S. economy? What sort of arguments were they other than your recent calls to bail out those responsible for this mess?)

People have been robbed (with the fiat currency fraud); they cannot be "unrobbed" and be made whole with more robbery!

http://www.suburbanhousehunters.com/about/mortgage-crisis/

"...we have convinced them that it is vitally important to the health of the U.S. financial system that investors not know about these complex transactions and what is behind them."

"Crap is crap." Putting it in a pretty package and calling it something else, doesn't change what it is.

Here is the durn forner´s humble view:

America REALLY need that rescue plan. Now. Every invention has its advantages and disadvantages, but this was your least bad bet.

Markus

we in Europe are in deep trouble as well. In fact I would argue it is going to be worse. At least in the US there good(ish) transparency.

Fortis Bank folded at the weekend and nobody even thought they were in trouble.

Also in Europe the Pan-European banking legislation was going to be implemented in 2012, so now we'll have different approaches to the same problem by the variety of govt.

It is all rather foolish...

Absolutely, Matteo. I believe there are factors within EU that could make it even more difficult to handle this than in the US. For example, with many banks working in several countries - what country should pic up the bill from its tax payers once it go belly up? At least in US there is one central government making the rules. Here we have, what, 27?

jyl, , I intend this in the best way, but please take some time off. I got away from the 'puter for a little while. The financial mess will be fixed without my rants. Let us save energy for the aftermath, when we must find ways to prevent the next meltdown.

I now acknowledge this will cost us a lot regardless of action. My concern turns to the ever growing debt loads. How do we contain its growth and prepare for the flood of retirees?
jurgen

I don't panic on days like yesterday, and just wait them out. However, I just decided to check my investments this morning (using Fidelity's "full view" which consolidates all of them for me), and can't get them to update...maybe that's a good thing :). I predict the "ground will rise" today (to offset the sky falling yesterday), but time will tell. Either way, let the chips fall where they may, and keep the taxpayer $ (socialism) out of it. On a side note...does anyone think the "banks" will intentionally perform a "credit squeeze" in order to facilitate the "sky is falling" bailout? Nah...they would never do that :(

There is no money out there right now. Period. There is no conspiracy. The banks are not these evil caracters that wanna screw the average Joe.

Let me put things in perspective...

If you leave the US market for a second and come to Europe you'll find that:
- Nobody wants to buy bonds issues by countries that are not UK or Germany.
- yesterday Belgium and Italy issued some bonds but they were perceived very risky by investors and the auction went poorly.
- Ireland and the Irish govt had to step in today and give a blanket guarantee for all deposits, covered bonds, senior debt and dated subordinated debt of selected Irish Financial inst.
- CDS (credit default swaps) on Greece and Spain are at their historical highs

And I can go on.

I do not think JPM, Goldman have teamed up with the Belgian/Italia/Greek etc govt to get the US congress to pass a plan that is actually very restrictive for the banks themsleves...

This is not a matter of saving the careers of a couple of greedy bastards.....

I hear you when you say "let the chips fall where they may" but I don't think this would be the ideal solution for the whole system.

I don't care to be honest. Personally I sold all my real estate and stock holdings in 2007. I am sitting on a pile of cash (Treasury bills actually as I don't trust the local banks) and I am just waiting to pick up cheap assets at nothing....

But this is not a good thing. My dad, brother, my close friends, my in laws... they would all get hurt. And nobody works in the financial markets.

My dad has a 1-man-band servicing company and his turnover would go to zero. My brother is a barman and the last 3 restaurants he worked for have closed. My father in law has retired and is finishing paying his house....