The Weak Dollar and the Too Big to Fails

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.

Break ’em up.

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  • All this TBTF is so 09. The next big thing is tightening our belts, living within our means, and raising taxes and cutting SS to pay for the bank bailout, the war bailout, and the medical insurers' bailout.But the bailouts and the tax increases are completely separate. See, one takes place one year and the other another. Gun the deficit up for one group, and demand that another group reduce it. It is the natural order, no? Even with societal inequity greater than the Robber Baron era, I don't see what could go wrong with increased taxes and decreased benefits on the people who had no control over structured finance and the global squid.The PTB will get around to talking about unemployment in December (gee, wonder who will be at the table on that one) while appointing a committee (gee, wonder who will be on that) to authorize cutting Social Security will come up in February. Do you suppose they will be any kinder to ordinary people than they have been so far? Naw, me neither. Balancing the budget will be done on the backs of the poorest, as we give the fewest campaign checks.