The $700 Billion Financial Bailout Failed – Good!

Posted on September 29th, 2008 in Politics by EngineerBoy

Just Say No

Today, the US House of Representatives voted against the proposed government bailout of US financial institutions.  Good.  We have a mostly free marketplace, and the less government intervention the better.  Yes, the government should set the rules, and perhaps even adjust them every great once in a while.  What the government should NOT be doing is constantly tweaking the rules and then bailing out the losers simply because they happen to be large.

Having the government artifically control the marketplace is…well…communism.  And we all know how well that has worked, historically.  It’s easy to understand why the government feels the need to do something – if they don’t, and the natural market corrections occur, many people will feel a lot of pain.  And most of those people will also be voters, and injured voters tend to react by throwing out whoever is holding the hot potato when the music stops.

And the music is definitely stopping.  After years and years of reckless financial policies, major institutions are finding that their worth is now based on undercapitalized loans to unqualified borrowers on overpriced assets.  Historically, we had regulations that prevented our large financial institutions from leveraging themselves so unwisely, but those regulations have been eroded over the last decade or so, and now the bill has come due.

And the bill must be paid, no doubt about it.  However, the bill should be paid now, by virtue of natural market corrections (with the associated, short-term pain) rather than through government bailout money, which can only lead to a solution that is, at best, inefficient, and, at worst, rigged to benefit the politically powerfully.  Personally, I trust the capitalist marketplace more than I trust the Federal government when it comes to the free market.  The government’s job is to set up a level playing field, but then not interfere in the game.

Can you imagine the outrage if, with four minutes to go in the Super Bowl, the NFL announced a bunch of rule changes, applicable immediately and designed to impact the outcome of the game in progress, simply because the team they preferred wasn’t winning?  Say it was the Dallas Cowboys versus the Baltimore Ravens, and the NFL desperately wanted Dallas to win because it would mean much higher fan interest and revenues for the following seasons, and Dallas is behind with 4 minutes to play.  So, the NFL announces that the Cowboys can immediately gain access to the Ravens full playbook, and listen in on all their called plays and headset communications.  Oh, and the Ravens have to bench their top offensive and defensive players, and their head coach has to spend the last four minutes of the game in a sound-proof isolation booth and can’t communicate with any of his players or coaches.

That would be outrageous.  But that’s what they’re trying to do with this bailout.  Every financial transaction is like a bet, at some level.  Every time you hear of a sell-off of shares, remember that there are exactly the same number of shares being bought as are being sold.  And when a person with some spare capital chooses to invest it via an investment bank instead of stuffing it in their mattress or buying government-backed T-bills, that investor has made a bet that the risk of losing that money is worth the potential for a higher return.  Well, those investors have lost their bets, and the government is coming in and trying to rig the game at the last minute.

Now, if the story is actually that the financial institutions (perhaps in cahoots with our elected officials) perpetuated some kind of criminal fraud on the American people, and the government is trying to redress that crime, that’s a different story.  But, first, announce that it is a crime, indict and arrest the criminals, put them in jail (not minimum-security country clubs), and then work to redress the victims. 

However, if this is simply a matter of greedy investors and ignorant loan-signers, then I say let the (blue) chips fall where they may.

2 Responses to 'The $700 Billion Financial Bailout Failed – Good!'

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  1. Bill Britton said,

    on September 29th, 2008 at 5:32 pm

    Good article!

    I certainly want minimal government intervention, so I agree with most of the thoughts here. Wall street greed, government intervention here and/or lack of proper oversight there, as well as main street (consumer) greed in many instances are all responsible for where we are. Time to look in the mirror and decide if we have accepted our role in this mess, even if our only fault has been to remain silent too long.

    The basic problem in my opinion is the liquidity crisis is morphing into solvency issues which leads to financial institutions backing away from dealing with each other. It is a vicious cycle. Main street is just beginning to feel the effects. The Fed has injected so much money into the system its mind boggling, but the situation is still getting worse.

    We need a solution to reverse the vicious cycle. There are some free market ideas floating around. I hope they are given a try ASAP. Regardless of a government bill or not or some free market solution, main street will feel lots of pain for years to come, blue chips and potato chips alike.

  2. EngineerBoy said,

    on September 30th, 2008 at 8:05 am

    Agreed on the vicious cycle needing to end. And it seems to me that the only surefire solution involves action by the government, even if it’s to do something like roll-back previous changes.

    My concern with the “bailout”, or perhaps more accurately, the “buyout”, is threefold (to say the least):

    1. The plan appeared suddenly, out of nowhere (at least to my perceptions), and the powers-that-be attempted to get it enacted instantaneously. Perhaps it really is a case where a delay would have been disastrous, but it felt, to me, like they were trying to slip one past the court of public opinion by not giving anyone time to dig into the details.

    2. The plan included a provision that the actions of the Fed could not be reviewed by any court. Now, one could interpret that as protection against frivolous lawsuits bogging down the process. One could also interpret it as the Fed wanting completely autonomous powers to do who-knows-what with $700 billion without the ability for there to be any oversight, by anyone, ever.

    3. The legislation included a provision that said something to the effect that the Fed was free to involve foreign firms in the bailout/buyback. Now, one could interpret this to mean good faith efforts with other central banks. One could also interpret it much more ominously. I assume the former, but fear the latter, and fall back to the old proverb: Trust in Allah, but still tie your camel.

    In short, if we had a month for peer-review of the legislation I might feel better about it, but I doubt it. Frankly, my faith in Washington is so low that I assume that the only thing that would happen with a month to refine the legislation is that it would get worse as more hogs try to shuffle up to the trough.

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