By David Treece
Did you know government sponsored bailouts are nothing new? The subprime mortgage meltdown made “bailout” a familiar household term, but in this article we will demonstrate that bailouts are nothing new.
In 1970 Penn Central Railroad was the largest railroad in operation and it employed nearly 100,000 American workers. Due to poor management it garnered a large debt load, which eventually forced it into bankruptcy. As part of the debt settlement, bankers from the various banks that had lent Penn money were placed on the railroad’s board of directors. These same banks held large portions of Penn stock. Naturally this drove up the stock price as they were infusing money into the company. The investing public was not privy. Nor had the public been made aware of Penn’s pending default.
The bankers were able to dump the stock after it had paid a dividend while enjoying the interest payments from the loans it had given the railroad off the backs of other unsuspecting stock buyers. Eventually this scheme came to a head, but the Federal Reserve was there to keep the bankers profitable.
Arthur Burns, the Federal Reserve Chairman at the time, instructed banks that low to no interest loans would be available to the banks in order to funnel more money to the railroad. The interest had to be low in order to incentivize the banks to make the bad loans. Of course the banks wanted taxpayers to co-sign on the loans, so the familiar chorus of the bailout game began.
Congress was told that the American public would be in dire straits if the railroad was allowed to fail. The employees would lose their jobs, and transportation would be costlier. The politicians dutifully passed into law the Emergency Rail Services Act of 1970, which provided $125 million in government backed loans.
Thus the railroad was nationalized. AMTRAK was created for passenger trains and CONRAIL was created for the freight portion. The later was eventually privatized and profitably exists today, but AMTRAK is still government operated and continues to lose money. Billions more have been given to AMTRAK since 1970 yet it still cannot figure out how to turn a profit.
Whether the impending doom would actually happen is questionable, and it is likely that the money given to the railroad was never repaid. Taxpayers lost, and further lost due to the loss in future purchasing power because the loaned money was freshly printed. The money supply had necessarily increased in order to make the loan.
In the book The Creature from Jekyll Island (the source of this information), the author explains that there were eight other large Federal Reserve bailouts before the 2008 subprime mortgage meltdown. These bailouts were much less significant in dollar values, yet they set a dangerous precedent for what eventually happened during the Great Recession.
We all remember what caused the subprime mortgage meltdown. Banks gave money to anyone who could sign their name and often over the value of the home, and the lenders were tempted to do this because interest rates had been kept low for many years. They were not making much on loaning money, and the government sells the idea that the American Dream includes owning a home whether you can afford it or not. Politicians notoriously look no further than their next election when evaluating the possible outcome of their legislative policy proposals.
From the above mentioned book, “In October of 2008, Congress passed a $700 billion bailout bill to save the largest banks in the nation, all of which were tottering on the edge of bankruptcy. Congressmen who voted for this had received 54% more in donations from banks than those who voted against it. The (Bush) White House urged news services to stop using the word ‘bailout’ and say ‘rescue’ instead. They complied.”
The book goes on to say that the government actually lied. A third party credit agency analyzed the deal made by the Federal Reserve and summarized that it actually represented $5 trillion. “That represents an additional $16,500 in lost savings and purchasing power for every American.” This is the Federal Reserve tax that we never actually see but feel in higher costs for everyday necessities. We touched on this in a previous newsletter linked here.
The banks were clever and packaged these bad loans together and sold them to various investors so they could get in on the action. Most investors had little understanding or lacked the ability to get past the glossy sales pitch. A couple of men were smart and anticipated these impending failures and shorted the mortgage market. “Shorting the market,” put simply, means that the buyer of the shorts expects the value of the shorted item to decrease, thereby allowing the purchaser of the shorts to profit when the value decreases.
So what’s the point?
Many of our newsletter readers have purchased physical precious metals because they understand that inflation continues to increase despite the government stating otherwise. Most people who have purchased metals over the last five years have been on an emotional saga of sorts due to the continual price manipulation from larger banks. Please read this article to understand how the prices are manipulated.
When we purchase physical precious metals it is the ultimate short, and shows that we have reason to believe all that meets the eye is not as it may seem to the unsuspecting public. When the men shorted the mortgage market they went through a similar emotional saga until their hunches paid off. We believe metals holders will be rewarded in the future for swimming upstream like the salmon. All of our naysaying, unsuspecting friends and family will be shocked, but we will need to show them grace when this time comes.