Lehman, Bear, Freddie, Fannie: What It All Means

The media and government tell us that the choices we currently face involve trade-offs between private interests and American taxpayers. This is a misleading oversimplification.

By Citizen Correspondent Josh Sidman

Date Posted: 09/14/08

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With the ink not yet dry on the massive bailout of Fannie Mae and Freddie Mac, today Lehman Brothers is expected to announce its bankruptcy, making it the second of the top ten American investment banks to go under this year. The numbers involved are so staggering that it is difficult to put them in perspective. How are we to make sense of a $10 billion loss, a $100 billion loss, a $1 trillion loss? For most people these numbers are beyond comprehension, and many Americans are left scratching their heads wondering what it all means.

As John Maynard Keynes – the greatest economist of the 20th Century – remarked after World War I, “The vast expenditures of the war, the inflation of prices, and the depreciation of currency, leading up to a complete instability of the unit of value, have made us lose all sense of number and magnitude in matters of finance. What we believed to be the limits of possibility have been so enormously exceeded. And those who founded their expectations on the past have been so often wrong, that the man in the street is now prepared to believe anything which is told him with some show of authority, and the larger the figure the more readily he swallows it.”

The media and government tell us (with as much show of authority as they can muster) that the choices we currently face involve trade-offs between private interests and American taxpayers. This is a misleading oversimplification. After all, when the government backed the $30 billion takeover of Bear Stearns, our taxes didn’t go up. (In fact, the government sent us all a nice tax rebate check right around the same time.)

It is basic common sense that we can’t spend hundreds of billions of dollars on wars while simultaneously bailing out banks without a corresponding increase in taxes. The US government owes almost $10 trillion. It’s the biggest debtor in the history of the planet, so what does it really mean when the Treasury offers to lend money to failing financial institutions? Where does this money come from?

The answer is that the US government has the power to print money, and they have been doing so at an ever increasing rate in order to hold off the financial tsunami that threatens to sink the entire economy.