The Hidden Secret Behind the Financial Bailout.
There is a hidden elephant in the economy that is being overlooked in the media but represents the driving force behind the fear in the financial markets. It is well known that the economy is driven by credit. Consumer spending relies upon it and businesses cannot grow without it. However; Americans unable to get credit is not the major issue surrounding the financial bailout.
Prior to 2007 there was a group of economists that saw no problem with this fact. The key to the new economy, they asserted, was not how much the United States was producing, nor how much the United States was spending. The real key was that foreign capital was funding it. In all prior economic environments government spending came at the expense of private spending. If the government had to borrow money it did so by getting it from domestic banks, which removed it from the private sector. In the new economy government spending excess is provided, not by dipping into the domestic money supply, but by bringing in new revenue from foreign capital. In this way government deficits were seen not as a problem but rather a benefit. Essentially the government could fuel the economy with OPM (other people's money). Likewise, banks and lending institutions could do the same and fuel the domestic economy with imported capital. That American assets were bleeding out of the nation was not perceived as a major issue. With $73 trillion in assets the United States could afford this trickle of blood for a number of decades until it had completely restructured the economy to not only stop the bleeding but begin re-aquiring those assets. The economists, bankers, and theoreticians believed they had found the perfect economic system and they knew they were smarter than everyone else.
The crisis in the financial markets puts this entire rationale at risk. The real fear is not domestic bank failures; but rather, that the influx of foreign capital will slow or stop if the government does not buy up the bad debt. If foreign capital is spent elsewhere the American economy will simply not have adequate revenue to maintain itself. Wall Street banks know very well that the bailout is needed to protect the integrity of the United States as a recipient of foreign capital. It is desperate to alleviate the losses to foreign capital suppliers. Otherwise they will simply invest in other regions. The American economy is largely dependent on bringing in outside revenue. If the United States financial system cannot protect the foreign suppliers it is destined to crash. The federal bailout is viewed as absolutely essential to reassuring the international capital markets that the United States is still a safe credit risk. If the American financial community cannot protect its international money flow from bad debt that flow will evaporate and take with it the financial system that has been built up over the past two decades.
--MORE--