The Dollar Socialized

If Karl Marx were alive today, he would have probably winked at Uncle Sam over a swig of Vodka and said ‘If Capitalism brought down the Rouble, your dollar stands socialized today.’

The US government’s $700 billion bailout package for some of the biggest financial houses like the AIG, Freddie and Fannie virtually amounts to nationalization of these private sector giants, something that is closely associated with socialism. Moreover, it is noteworthy to observe that the bailout packages are not to the immediate benefit of shareholders, but more to save the common man and his mortgage. That smells of socialism again! Or with elections around the corner, is the proletariat more important than the bourgeoisie .

The great bailout devised by Secretary Henry Paulson gives the government the authority to buy out home mortgages, asset-backed securities and commercial mortgage assets in order to infuse stability into the tethering US financial system. This move will make the US government, the buyer of the last resort of mortgage linked assets, virtually giving them a governmental guarantee. What is interesting to note is that few banks or financial institutions across the globe are willing to buy or back any such assets as was clear from the collapse of Lehman Brothers. Hence the US government is being forced to do so in order to prevent a complete collapse of the financial system.  

However, the Congress is yet to approve the $700 billion bailout package and a lot of effort seems to be going into it for its smooth passage. Public posturing by Bernake and Bush on the status of the economy not only signify the financial mess the system is in, but also the desperation for getting a Congressional approval for the bailout package. So serious is the condition of the US economy, the Presidential address on the issue is being compared as equally important to the 9/11 Presidential address.  

While Bernake has asked for a massive governmental takeover of shaky assets in order to instill confidence in the economy, the US Congress is questioning the move as it involves using the taxpayer’s money to save big banks. However, if confidence needs to be restored into the economy, then mortgage based lending needs to gain momentum. This is unlikely as long as mortgages remain shaky and that is what the government wants to address. Once the government acquires shaky mortgages, they will come under virtual government guarantee and banks will not mind advancing credit against them.

As a true barometer of the health of the economy, similar to the stock of a company, which represents its health, the US dollar has begun to dip. While, the further deteriorating state of the US economy should result in a depreciating dollar, an immediate effect of the bailout approval is likely to be a knee jerk strengthening of the dollar. Beyond that, the value of the dollar will depend upon the performance of other major economies like Europe and Japan and how the US economy is expected to perform post the bailout package.

In the medium term, the liquidity crisis needs to be addressed, which may require a lowering of interest rates. If we view this as a recovery period for the US economy, the dollar should logically dip, which it might with a lowering of interest rates.

Ironically, in the heartland of capitalism, where the free market is supposed to thrive, a massive government intervention is being initiated to prevent the collapse of the economy. Though ultimately, this is likely to lead to the restoration of market confidence, Karl Marx would indeed have had a hearty laugh at the expense of capitalists using socialist methods to shore up their economy.

 

Proletariat – Common People

Bourgeoisie – Capitalist

4 comments

  1. jgoodwin

    Bravo… very nicely written. And, so true. One can only hope and pray that it won’t take too long for the garbage that the US Treasury is proposing to buy to gain in value enough to be sold and cleared off of the ‘Peoples’ books.

    Reply
  2. jgoodwin

    Bravo… very nicely written. And, so true. One can only hope and pray that it won’t take too long for the garbage that the US Treasury is proposing to buy to gain in value enough to be sold and cleared off of the ‘Peoples’ books.

    Reply
  3. delbertino

    Why does Peter Schiff insist that banks have a solvency problem instead of a liquidity problem? Experience tells us that a bailout will be worse than the problem we now have. Why did it take an economist to say that sooner or later Iran must be dealt with militarily? USD has one leg and that is weak oil. I hope everyone caught a piece of what happened last night. Three charts went the right way;if only for a short while. If the Euro was overbought before this slapdown, what is the USD now? Remember your Mom saying “If you run from this whippin’ it will be worse”? Wasn’t Karl Marx an economist? The “Rich and Superrich” by Ferdinand Lundberg, written during the oil crisis in the ’70′s is a great read. How many Americans realize that we cut-off Japan’s oil supply before Pearl Harbor? All wars are economic. Leading up to WWII Germany had been paralyzed by the Versailles Treaty and their currency was all but worthless. Will the US protect Taiwan from China as promised?
    We already bailed on Israel. What is Turkey going to do? Capitalism is the only chance an ordinary guy has. The Asians are ferocious for capitalism and have proven it to the world.
    The largest democracy in the world is India. They are also a very important ally as we fight trade talks with them. The chart list will be turned upside down as rich countries like Thailand and Vietnam get their legs. China will have the final say; much to our chagrin, but they are holding our note. The disputed boundary, on the East China Sea between Japan and China will sooner or later boil over. Everyone wants Nukes now. There will be plenty of lessons to learn in the very near future. Thanx for taking the blame for using the “E” word. The US is the best but sooner or later the rest of the world had to find out what they didn’t have: “Colonel Sander’s Chicken” (extra crispy).

    Reply
  4. delbertino

    Why does Peter Schiff insist that banks have a solvency problem instead of a liquidity problem? Experience tells us that a bailout will be worse than the problem we now have. Why did it take an economist to say that sooner or later Iran must be dealt with militarily? USD has one leg and that is weak oil. I hope everyone caught a piece of what happened last night. Three charts went the right way;if only for a short while. If the Euro was overbought before this slapdown, what is the USD now? Remember your Mom saying “If you run from this whippin’ it will be worse”? Wasn’t Karl Marx an economist? The “Rich and Superrich” by Ferdinand Lundberg, written during the oil crisis in the ’70′s is a great read. How many Americans realize that we cut-off Japan’s oil supply before Pearl Harbor? All wars are economic. Leading up to WWII Germany had been paralyzed by the Versailles Treaty and their currency was all but worthless. Will the US protect Taiwan from China as promised?
    We already bailed on Israel. What is Turkey going to do? Capitalism is the only chance an ordinary guy has. The Asians are ferocious for capitalism and have proven it to the world.
    The largest democracy in the world is India. They are also a very important ally as we fight trade talks with them. The chart list will be turned upside down as rich countries like Thailand and Vietnam get their legs. China will have the final say; much to our chagrin, but they are holding our note. The disputed boundary, on the East China Sea between Japan and China will sooner or later boil over. Everyone wants Nukes now. There will be plenty of lessons to learn in the very near future. Thanx for taking the blame for using the “E” word. The US is the best but sooner or later the rest of the world had to find out what they didn’t have: “Colonel Sander’s Chicken” (extra crispy).

    Reply

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