Friday, November 13, 2009
Former chief IMF economist Simon Johnson points out that the U.S. is intentionally weakening the dollar in order to bail out the too big to fails:
To bail out our banks, we need cheap money, and this implies some inflation. To finance our current account deficit, investors need to think they are buying inexpensive assets from us. Everything points to a cheaper dollar...
Short-term rates (controlled by the Fed) will stay low, while long-term rates (market-determined and affected by trust in our Treasury and Fed to keep the value of dollar strong) will rise as people fear their dollar investments will be debased. There is no doubt that both the Fed and the Bank of England know what is happening. The spread between short- and long-term rates (known as the “yield curve”) will rise, and banks will benefit; would-be home buyers and people with overdrafts or outstanding credit card balances pay more, while savers get little.
This is how the public pays for the past losses of our financial system.
We don’t have to do this again and again. We could start by changing our financial system from the roots. We need to credibly remove the promise to bail out our large banks each time they fail. This means forcing them to hold more capital, dividing them up so they are smaller, and then letting them fail when they make poor gambles.The Treasury’s past and current close connections to Goldman Sachs, Citigroup and other major investment banks illustrate how our own doom machine functions. We need to break up these “banks” so they are small enough to fail, and also ensure that no bank, regardless of its connections, is able to demand that the Fed and the Treasury support its solvency in the future to prevent financial collapse.