Punishing the Prudent

One of the dominant myths of America is that we practice one of the freest forms of capitalism on the face of the planet. Hard work and prudence are rewarded, while Schumpeter's 'creative destruction' quickly cleans out the mistakes.

Unlike most myths, this one apparently lacks a kernel of truth at the core.

As the details emerge over the various bailouts and market distortions, it is becoming clearer that moral hazard has been increased, not lessened, and that those who behaved prudently during the credit bubble insanity are going to be punished.

Some are getting angry:

[quote]Community banking executives around the country responded with anger yesterday to the Bush administration's strategy of investing $250 billion in financial firms, saying they don't need the money, resent the intrusion and feel it's unfair to rescue companies from their own mistakes.

And in offices around the country, bankers simmered.

Peter Fitzgerald, chairman of Chain Bridge Bank in McLean, said he was "much chagrined that we will be punished for behaving prudently by now having to face reckless competitors who all of a sudden are subsidized by the federal government."

At Evergreen Federal Bank in Grants Pass, Ore., chief executive Brady Adams said he has more than 2,000 loans outstanding and only three borrowers behind on payments. "We don't need a bailout, and if other banks had run their banks like we ran our bank, they wouldn't have needed a bailout, either," Adams said. [/quote]

Link (Washington Post)

Free markets? Fair competition? No, not really. Not at all.

This next article puts that in high relief. The Fed was going to buy corporate paper in an attempt to loosen up the flow of money in those markets, which would have been an admirable goal, in and of itself. But the Fed, for some reason I do not yet know, decided to insert a massive distortion into the market at the same time.

[quote]Oct. 15 (Bloomberg) -- The Federal Reserve may subsidize America's companies by purchasing their short-term debt at rates below those demanded by private investors in the $1.6 trillion commercial-paper market.

Fed officials yesterday set the yield they will pay for commercial paper at about 1.6 percentage points less than the average cost for financial companies, weekly central bank data show. Policy makers last week announced emergency plans to buy the securities after the market shrank to a three-year low.

The discount cuts the cost of cash to 2.2 percent from 3.7 percent for General Electric Co. and from 4.7 percent for Citigroup Inc., data compiled by Bloomberg show. One possible unintended consequence: private buyers are shut out. [/quote]

Link (Bloomberg)

Citigroup has a gigantic "Level 3" asset pool of more than a trillion dollars, and the free market decided that, because of the additional risk associated with those past decisions, Citigroup should pay a higher rate of interest on their debt. The Fed has now decided that Citigroup and GE (a very sound company) should pay the same rate to borrow. What's next? Dictating that everybody should pay the exact same mortgage rate? Isn't that exactly what got us into this mess in the first place, a distortion of the market's ability to properly price risk?

The Fed may have had good reasons for this, but it is one more very large intrusion of the government into a formerly free market. Such interventions distort true pricing, and it is a virtual certainty that the Fed will both subsidize this market and end up the owner of a lot of defaulted debt. This monetization of bad debts is among the most inflationary of all possible Fed actions.

And even as real problems mount in the real economy, all of the Treasury Department's and the Federal Reserve's attention seems to be focused on the banking system, to the almost complete exclusion of the needs of regular people.

To put all this in context, I am going to repost a snippet from a comment made yesterday by reader Davec007 (Dave Cohen):

I have not commented up to now, but now that we see the trajectory of the Fed's "intervention", I have a few things to say.

From an energy perspective, it is now clear that any adequate response to the oil supply/price problems we will have after this U-shaped recession is over will be impossible. Most of the funds that might have been put into infrastructure changes (long-haul railroads, light rail, restructuring the geography of living & work, adding large amounts of renewables to the grid, etc.) have already been given to the banks.

The "save Wall Street to save Main Street" rhetoric has not only served to facilitate one of the largest rip-offs in history, but it has doomed the "real economy" to a state of perpetual recession, or worse. We had a taste of Things To Come when oil hit $147/barrel, and we had another in the last few weeks when crude oil production in the United States fell below 5 million barrels per day for the first time since 1946. This latter was due to the hurricane disruptions, but such production numbers will become routine after 2012. You read that correctly -- since 1946.

I only wish and hope that when our true emergencies in energy and infrastructure are made clear to the DC crowd, they respond with the same urgency and magnitude as they have in their near-immediate multi-trillion dollar bailout of the reckless and the imprudent.

This is a companion discussion topic for the original entry at https://peakprosperity.com/punishing-the-prudent-2/

It is scary to find myself hoping that all this insanity is due to horrible group think: hoping that they really think that by propping up big banks they can make everything go back to the way it all was. But I find it harder and harder to actually believe it. And the other option is truely terrifying…

The events such as this lead me to conclude that behind the scene is an agenda. The agenda appears to portend a world where nation states are diminished and a global state is pushed forward. America the super state must diminish for this agenda to move forward. The international banking cartel and her elitists that are behind their administrators are maneuvering for a checkmate.


Thanks for the article Chris. I wonder what if anything can we do about it? Do we (or DC) really have to wait till things get too bad to fix before action can be taken? Is seems exceptionally bad that prudence is punished in a time when prudence needs to be encouraged. The real problems are just starting and the world is putting itself in to a worse position to deal with the coming storm. I don’t hear anyone in Washington speaking to the real issues that confront us.
By the way, we should probably stop calling ourselves taxpayers when we complain about the money that is being spent. We aren’t paying taxes for these bailouts, we are borrowers, the government is borrowing in our name, and when I see the trillions of dollars we owe and compare that to the size of our economy (even when it was running hot) I don’t see how we will ever pay that money back. The government is making us defaulters, either directly,or with inflation/hyperinflation. So as a defaulter who’s not happy about it, I wonder what I can do.

"From an energy perspective, it is now clear that any adequate response to the oil supply/price problems we will have after this U-shaped recession is over will be impossible. Most of the funds that might have been put into infrastructure changes .... have already been given to the banks. "

One big question is what will the banks do with the funds (after exorbitant executive pay and bonuses for screwing up)?

All viable long-term energy solutions include substantial increases in domestic drilling if for nothing more than the transition to alternatives. History demonstrates that energy transitions take 60 years (Mann, 2000; Bromley, 1994). The most accelerated program (for which there is no money) might achieve some meaningful energy transistion in a 20-30 year timeframe if the delapidated patchwork electric grid can be overhauled. Therefore near-term drilling can produce energy we’ll need in the (dreaded) twenty-teens.

BUT… Nancy P & Co. have cheerfully identified the oil companies as a source of financial support for their wish-list. It should be recalled after the apparent successes of the oil companies in 1973-74, an "excess profits" tax was imposed, this during a period of high inflation and rising interest rates. The oil companies became severely strapped for capital, which limited exploration and development and brought the second oil crisis in the same decade.

Not that the Imperial Congress knows or pays any attention to history.


My question now is how does this change the timeline of events to unfold, especially since the rest of the G7/G20 is following the same trajectory in bailing out the banks/bad behavior. I would assume this would almost guarantee the hyperinflation here in the US, but does this mean that the currencies of the rest of the world will also suffer same? Can you extrapolate from what unfolding presently to give us an idea how you see this playing out?

Let’s inject one other point that we are overlooking.

The banks we are talking about being prudent are regional banks that did not grow past there ability to manage their own business. That is intelligent as a business person. That does not mean they have a lot of power.

The more people you have, the more money on the balance sheet, the more power you wield to hurt the community around you.

If General Motors goes belly up. 10’s of thousands of people go out of work nationwide. The government will step in and help. If mom and pop’s store goes under, not many people will care.

It is the same here with the banks. They go down, it effects our national community.

Should this actually happen in a free market? Darn right, there is a natural cycle that happens with a lot of pain but all will be better when the system balances and heals.

HOWEVER, no politician wants to take that much of a hit on there watch, especially to there buddies that give them the big bucks for the next campaign.

Lets look at this a friend of mine found today:

Along these lines, both Senator B. Hussein Obama and el Senador Juan McCain voted for the coup. Why? Here are the top ten corporate PAC contributors to both candidates:

Communist Candidate A Communist Candidate B

Goldman Sachs $739,521 Merrill Lynch $379,170 UBS AG $419,550 Citigroup Inc. $287,801 Lehman Brothers $391,774 Morgan Stanley $249,377 Citigroup Inc $492,548 Wachovia Corp. $147,456 Morgan Stanley $341,380 Goldman Sachs $220,045 Latham & Watkins $328,879 Lehman Brothers $115,707 Google Inc $487,355 Bear Stearns $108,000 JPMorgan Chase & Co $475,112 JPMorgan Chase $206,392 Sidley Austin LLP $370,916 Bank of America $133,975 Skadden, Arps et al $360,409 Credit Suisse $175,503

Well isn't that interesting????????????????????????????????????????

((Look up http://www.newswithviews.com/Stang/alan167.htm for full artical. WARNING, artical has some objectionable language and some views that, in my opinion, are hateful, but I can understand the "general" emotion due to the situation we find ourselves))



Hello All:
Can we do something positive to help?
Clearly we see that the crew of this jumbo jet called the economy is fixated on bad instruments and is not looking outside the cockput window at the mountain they are about to run us all into.
Can we:

  1. Write a letter explaining to everyone in Congress and everyone in the Senate our situation and the real problem?
  2. Can we tell them how we got here (Fiat currecny and cooked indicators (GDP and Inflation and Debt)?
  3. Can we use email and the internet to get this thing signed and mailed into our lawmakers so they can fix the problem not the symptom?
Maybe I'm a Polyanna but seems to me we are a great nation of smart, resourceful and creative people and if we could get 7 trillion bucks put into alternate energy it would allow us to:
  1. Keep 7 trillion bucks here as opposed to sending it to more radical areas of the globe
  2. Let us EXPORT more than we Import so we could pay down debt instead of incuring debt by spending more than we make
  3. Stimulate what is left of the economy (if it isn't too late)
  4. Protect our democracy since it relies on a good economy
  5. Help our enviornment
Seems like this site knows the problem and the answer and for whatever reason the few people in the cockpit are clueless. I really doubt they want to auger in, they are on our economy flight and have kids on it. Just a suggestion. It seems we (myself included) are convinced that hope and optimism have been sucked out of our cabin? Take care,



You are thinking way too intelligently. Good Job!!!


More like "Stealing from the Prudent!"

where do you intend that 7 trillion dollars to come from? the printing press? You thought inflation was gonna be bad… just throw 7T in there and you really have a party. May as well move to zimbabwe

7 trillion is I believe what we pay every five years for oil…

The whole speech here…


This is an excerpt from Atlas Shrugged written by Ayn Rand, seemed appropriate in our present situation,

"When force is the standard, the murderer wins over the pickpocket. And then that society vanishes, in a spread of ruins and slaughter."

"Do you wish to know whether that day is coming? Watch money. Money is the barometer of a society’s virtue. When you see that trading is done, not by consent, but by compulsion–when you see that in order to produce, you need to obtain permission from men who produce nothing–when you see that money is flowing to those who deal, not in goods, but in favors–when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you–when you see corruption being rewarded and honesty becoming a self-sacrifice–you may know that your society is doomed."



"The chief executives of the nine largest banks in the United States trooped into a gilded conference room at the Treasury Department at 3 p.m. Monday. To their astonishment, they were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Henry Paulson Jr. said they must sign it before they left."

Wow! I think we have had a soft coup, Hail Paulson.

[quote=mellison]All viable long-term energy solutions include substantial increases in domestic drilling if for nothing more than the transition to alternatives.
Can you tell me what evidence you base the statement above on? Everything I’ve seen suggests that offshore and ANWAR drilling will not ever have a significant impact on oil supply, and will have no discernible effect whatsoever in the next ten years. Below is a quote excerpted from an EIA analysis of what effect lifting the ban in 2012 for the Lower 48 OCS would have on U.S. oil production. For the full article follow the link below.
The Energy Information Administration (EIA) of the U.S. Department of Energy used the MMS data to assess what impact a lifting of the ban in 2012 for the Lower 48 OCS would have on U.S. oil production. Basically, the EIA estimated what fraction of the technically recoverable oil would be economical to recover, and how fast it could be produced after 2012. Leasing would begin no sooner than 2012, and production would not be expected to start before 2017. The EIA found that access to the Pacific, Atlantic, and eastern Gulf of Mexico regions would not have a significant impact on domestic crude oil production or prices before 2030. Total domestic production of crude oil from 2012 through 2030 is projected to be 1.6 percent higher than in EIA’s "no access" reference case.
The effect of that quantity of oil on the price of oil would be indiscernible. Oil prices are determined on the international market, and the addition of about 0.16 million barrels per day from the OCS in 2030 to total world oil production would have no significant impact on oil market fundamentals. The world consumed about 86 million barrels per day in 2007, and will consume about 112 million barrels per day in 2030, according to EIA forecasts.

There has been some talk in this thread regarding not only the money issue as it relates to all countries, but it has spoken to the issue of energy’s role in the situation as well. Consider that while we are discussing the economy, the money supply, debt, and energy - both current and future alternatives - that we may be missing a much grander scheme at work here.
Has it occurred to anyone that perhaps ALL these things are the same thing? We may be making a huge mistake by assuming that the issues at hand are somehow separated from one another? Let’s look at this thing from a giant step backward and change the perspective a bit. All of the worlds great banking institutions are suffering so in a way that requires all of the international governing bodies to meet together and formulate the "Saviour" of the world’s economy. This big world-wide save is at the ultimate detriment to these governments. That in doing so the funding for all significant research and development as it relates to the infrastructure is transferred to a unified cartel at a global scale. That once complete, the world governing bodies become themselves enslaved as a group, required to rely on ‘private’ development of future technology without oversight or controls. The fact that small (er) developers and entrepreneurs will be unable to heed off the pressures of buy-outs and market crushing tactics of the largest R&D groups. And, most importantly, that those largest R&D groups will be the oil companies themselves, funded and supported by the central money controllers, to create not an oil industry as we have all so narrowly known, but a global ENERGY INDUSTRY. Be it oil, NG, hydrogen, solar, wind, bio-fuel, whatever. Rest assured, you will purchase your future ENERGY from the same people you purchase it from now. The petroleum industry is as tied to this mess as anybody else is, and the money they are amassing is staggering. Where do you think all this money is going? How about to ensure that they have the purchasing leverage to monopolize whatever ENERGY is used - ever! When the oil runs out, they will still have jobs.
"From an energy perspective, it is now clear that any adequate response to the oil supply/price problems we will have after this U-shaped recession is over will be impossible. Most of the funds that might have been put into infrastructure changes … have already been given to the banks. "
Control of the money may be power, but turn off all the lights, and take away the cars and you’ve really got something. Keep in mind that oil is the reason we go to war, and the benefactors are the banks - they’re the same!

The problems all stem from the same root: you can’t have infinite growth on a finite planet. Yet our entire economy is predicated on the notion of infinite growth. Clearly, TMU (The Master of the Universe) know this, and no doubt also knew that eventually it would all come tumbling down. So they have taken steps to protect themselves. A massive redistribution of wealth started 28 years ago, but it’s been redistributing the wrong way, trickling up instead of down as we were promised. A final massive looting in the form of "bailouts" that is just another way of taking money from people who haven’t got enough and giving it to people who have too much. Meanwhile stupifying the common person by making him feel "wealthy" by extending apparent infinite amounts of easy credit for the purchase of flat–screen TVs, iPods and salad shooters.

It’s over, and my guess is that it ain’t coming back. On reflection, I’m not so sure that’s a bad thing. Maybe it’s time to reclaim some of the simple values that made America what it was and should be, a place for independent thought, outspoken, involved citizenry living simple lives as part of a larger, mutually supportive community that values strength of character, honor and the consitution.

Or am I just hopelessly old–fashioned?

THIS JUST IN FROM NPR ( national propaganda radio) sponsored by citibank etal.

"this plan is well thought out, it is necessary and in the long run i believe this economy will come back"

g.w. bush

oct 15 2008

well this is what i heard " the money masters are in complete control this is not an accident. we have been planning this for hundreds of years. the way this works is we flood an economy with cheap capital and easy credit then we pull the rug out. we tighten credit and withdraw money from the system. at which time we can then consolidate banking instititons ie. eliminate competition.(competition is sin…jd rockefeller) once we have destroyed perfectly sound companies we can then buy them at pennies on the dollar. we will reward those who have aided us in this well thought out plan. those that have aided us most are congress people who were so kind to provide their services at bargain basement prices this is all necessary so that we can create a new world order as declared by my daddy and his friend david rockefeller whose grandaddy was funded by the rothschilds. we will continue to incite wars around the world as this gives us maximum profits because we fund both sides of every conflict. i believe this economy will come back but will be totally unrecognizable to anyone familiar with the american economy pre 1913"

so radiance ron there you have it . dave okst in answer ot your question "what can we do ?"

ah well the vast majority of the american public did not want this sellout. our representatives ignored us (no taxation without representation). the ayn rand quote provided by greg roberts is a pretty good indicator that the system is broke beyond repair for us anyway. when confronted with the same set of circumstances guys like washington, jefferson , franklin, paine, henry, adams came to the conclusion that there was only one answer. just history.

so i guess from where i look at it we can either be willing or unwilling serfs. no one on this site has yet answered my question " is it rape first then pillage or pillage first then rape?" i have an idea

may god have mercy on us

Keep 7 trillion bucks here as opposed to sending it to more radical areas of the globe

having been to other areas of the globe it would be hard to imagine a more radical part of the globe than right here. most of the rest of the world think we are maniacs and i happen to agree with them. we have over 800 military installations in 130 countries we have overthrown governments everywhere. U.S hegemony is the most radical force in the world today.

yes we should keep the money here but please leave out the jingoism


Since this current system of govt. is now broken, there is no point in attempting to influence those in government positions through phone calls, letters, emails, faxes, etc. The outcry against the bailout and the response by reps is proof that we do not have a representative govt. They planned many moons ago to nationalize private debt and drain the nation’s coffers and that plan is now being implemented. They knew after 9/11 that they would get away with it. We will have to overthrow and reestablish a decent system of government. But first the people must realize they have much more to lose than gain by continuing with the current system. I do not think that tipping point has been reached. Lying to oneself that these people mean well is just pretense based on fear of facing the truth. The crime syndicate cares for no one, just their power base and that should be clear to all - but it isn’t…not yet. We can call this syndicate the MIC or G8 - but it is the same thing. The America we thought existed - if it ever did - is over. First awareness of what is - sort of like those 12 step programs "Hi my name is_____ and I live under a crime syndicate."