One reason why the US is bailing out everything

Why is the US government continually bailing out everybody (and Republicans and Democrats alike are all for it)? In September, Treasury head Paulson threatened Congress with the idea that there would be riots in the street and martial law if Congress didn't approve the bailout package so maybe that scared some of them to support it. But there seems to be more to it. Since the US debt has become the next bubble (i.e. pyramid scheme) the US government wants to delay the collapse for as long a possible. Here is an excerpt that explains what could be going on and why both parties in Congress are willing participants in the bailouts.

It has become evident that as China continues to purchase our debt, the US government directs those assets to various industries. The areas that funds are directed to are the areas that could cause harm to counterparties and thereby raise the spectre of default on US Government debt.

Here’s a couple of examples: Fannie Mae (FNM: 0.76 +0.07 +10.14%) and Freddie Mac (FRE: 0.73 +0.04 +5.80%) are two “quasi” government agencies. They were not considered “direct” obligations of the US Government, but it was implied that the USA would support them in the event of a possible default. Foreign governments owned large amounts of FNMA and FRE. When it looked like they would fail, USA stepped in and backed them. AIG (AIG: 1.57 +0.01 +0.64%) is a another institution with huge counterparty risks. The USA stepped in and supported them. GMAC, GM (GM: 3.20 -0.60 -15.79%), and Chrysler all companies that carried huge exposures. The USA stepped in with all of them. Why?

The reason why the Treasury is supporting all these entities is that they cannot give any credence to the theory that the USA might let those major entities fail and create problems for the counterparties. Why? The perceived increase in default risk would bring into question the likelihood that the USA might actually default on its own debt. I think that most of the bailouts that we’re witnessing are being done to demonstrate to the rest of the world that we will not let default happen. Counterparties are being kept whole. If counterparties were forced to take actual losses as entities (AIG, BS, FNMA, FRE, MER) were allowed to fail, those same counterparties would become skeptical of the USA and the foreign appetite for US debt would start to shrink.

The USA needs to continue to demonstrate to the world that they will not default at all costs. As soon as the world perceives increased risk of default, the game is over and we will not be able to sell our debt. We will not survive as a country at that point. It’s a terrible and scary situation.

http://www.dailymarkets.com/stocks/2008/12/30/some-predictions-for-2009/