When government becomes bankers and they profit from it, who wins?

In memos from the US Treasury department conveniently revealed years after the bailout happened, the US Treasury knew at the time of its acquirement of Fannie Mae and Freddie Mac that these outfits would become profitable sooner than later. According to ProPublica’s bailout scorecard (updated in July 2017), the United States government received $271B in dividends after its initial $187B bailout, resulting in a slick $84B “profit” nine years after the fact.

Noticed how I put “profit” in quotes. The government doesn’t actually work on profits. You don’t get a check from them if they receive more money then they invested. Where does that money go, then? Does it go into humanitarian causes, social services and distribution to the poor? Will it magically offset any potential budget shortfalls for all of our national social programs? No.

But even if it did, I would be cautious in approving of this practice of having governments turn into bankers - especially when its the bank that caused more harm than good. The housing bubble was created by the Federal Reserve (that private bank which has defacto currency manipulation powers granted by the federal government) as an economic stimulant as a response to the NASDAQ/tech bubble from the late 1990’s (as well as to keep the gears turning during the United States invasion of Iraq). The Federal Reserve decided to open the floodgates and lower the prime rate to all the large private banks and lenders. This then enabled banks to lend out more than they actually have in their vaults, because if they needed to borrow from the Federal Reserve in a pinch, they would not need to pay them anything significant back in return on the short run.

We all knew what happened next. It was a recipe for financial disaster. How were the banks able to lend out this much money? Why were they approving people for loans they knew they would never see? One would figure banks would be properly stringent with their money, or at least not be so risky with it.

But it was pretty clear why they were doing what they were doing - they knew they would get bailed out. It was a shell game. Banks hid their bad assets, disguised them as mortgage-backed securities, re-named and moved them around while people gambled on them, and people gambled on the gambling. But the bailout was their ace in the hole; if they could get the government to cover their losses (beg them to if need be), they would come out magically clean.

But then how does that government get the money to bail them out in the first place? Well, they don’t. Governments used to be good in balancing their books, but much has changed now. Now it is a ponzi scheme that can only borrow from the company store in order to get some more - that “store,” once again, being the Federal Reserve.

Thus, even if the federal government “profited” from acquiring quasi-private firms like Fannie Mae and Freddie Mac, the money they make will otherwise be spent on budgets that constantly run deficits and always will be. It gets lost in that financial black hole. So who won in the end? The banks did, the Federal Reserve did, all the higher-ups in government get to glad-hand themselves and the banks for doing a good job and claiming they saved the economy. But really all they did is just keep the rest of us broke.

A sounder economic approach would be to adopt a system that doesn’t have the government or central banks to pick and choose favorites, especially favorited by their balance sheet. But in order to do that, we need a decentralization of banks; which means a decentralization of currency. Money’s definition should not be dictated by government or by force or fraud, but rather by the demand of the people. The housing bubble occurred because all banks were going to one source that had the ability to create credit at will. That’s the problem; there needs to be a natural, voluntary stop of credit. Legally enforcing one source the ability to create credit out of nothing is too much power given to too few people.

Furthermore, we have to remove the moral hazard of bad lending practices. This means bad banks should be allowed to either die, or be acquired by other sources; and we should allow financial institutions to be creative in how debts can be paid off. We cannot do that with a single form of legally-recognized currency. The focus of the matter should be giving power back to the people. If we really want to change the system, this is it. Let’s decentralize our national currency.

Or, we can just continue with our current system of banks colluding with our government, the rich getting richer while the poor remains poor.