It seems that we cannot turn on the TV, open a newspaper, or open our cell phones (with the internet, of course) without seeing some story about how messed up our economy is and that another financial institution is about to go under. If you continue to read on, I have no doubt you will see another story about how the government is going to take over or is in talks to take over that failing institution. We have spent several hundred billion dollars already rescuing mortgage and financial "giants" to prevent them from going under.
In one instance, the government provided assistance for a $30 billion buyout by Morgan Stanley of one of its "competitors" in the financial world. What the outrageous part of that "assistance" was is that Morgan Stanley put up a measly $1 billion while you and I, okay, it is really the Chinese that did, put up $29 billion. Really? The government provided over 96% of the funds and we allow this other institution to buyout its competitors? At the same time of all of these rescues, the government decided not to rescue Lehman Brothers, which had to file bankruptcy because the government would not secure a loan. It can be assumed that unlike the other bailouts, the foreign markets were not as heavily invested in Lehman's and so, it could be allowed to disintegrate without allowing a foreign major investor (China) from losing billions of dollars that could force them to stop buying U.S. Debt.
Last week, the government bought out AIG and took that institution, the world's largest insurance company by the way, over and nationalized it. Since when is it the role of Government to rescue and bail-out bad businesses that have made even worse decisions in the world of business. Let's face it, this is a (semi) capitalist world and business natural selection should be allowed to play out. Now, don't get me wrong, the Government should not sit back and practice the Hoover style Laissez-faire economics and allow the U.S. and world financial system to collapse. That would effectively ruin all governments (to the joy of lots of people, I suppose). The bailouts, most of which I do not agree with, are only treating the symptoms and not the cause of this collapse. Fannie Mae and Freddie Mac was very cleverly set-up so that its funds would be so well insulated and protected from market collapse except in the case of a financial perfect storm. Well, we entered that perfect storm and their wide distribution of funds now required the US government to re-nationalize those institutions.
Of the bailouts, I agree, mostly, with the AIG takeover. Not because of the significance of the institution or its importance in the world market but because of how it was structured. The US Government, you me and the Chinese, is now able to get 80% of the stocks and become a major shareholder. This means that we now have a ventured interest in the success of this company because we are part owners. This means that, assuming the market stabilizes and bounces back in the next year or so, the profits that these companies make (in good economic times) will provide a new stream of revenue for the Government because we own 80% of the stock. These companies have and can make a fortune and since we bailed them out, we deserve a piece of the pie. This is the Government thinking of new ways to provide a stable new source of revenue that will allow us to start to reduce our reliance on deficit budgets. New Non-Tax revenues are a vital component of a stable government balance sheet and more governments, Federal included, should start running their business like just that… a business.
Now, I know this is not the answer to all of our problems. We still need to prevent this from happening in the future and in the mean time, if a vital institution is about to fail that would further destroy the market, then by all means Government… Intervene. Just do so smartly and continue to look "outside" the box for long term solutions, not short term bailouts of businesses that were, for the lack of a better word, STUPID.
3 comments:
I don't see how your title relates, but I like your view of the situation. Very articulately argued.
I'd like to point out that AIG is one of the biggest reasons for the current debacle. They wrote TRILLIONS (and I mean TENS of TRILLIONS) of dollars of credit default swaps. They allowed people to bet that the market would collapse. And when it did, in a fantastic way, they ran to the government for protection for their own short-sightedness. I, for one, would rather see them destroyed and their assets sold off to smaller, more manageable companies rather than have one giant entity still running the show. It's also time to re-implement oversight of financial instruments and accounting and include ANYTHING used as a financial instrument, including credit default swaps which are currently classified as private contracts with exactly NO oversight and no way to punish the people that bet so heavily on them.
I'm normally not much of a laissez-fair type because I've seen enough hanky-panky (Enron, Worldcom, Ma Bell, etc) to know that markets cannot regulate themselves, particularly when it comes to ethical decisions. But if these guys are going to take all that risk, they should suffer for it. Instead, they're getting bailed out.
I do agree with you 100% on the fact that the tax payers should get a cut of future profits. That's good policy. You can be damn sure if Wall Street was bailing out the Feds they would find a way to cash in, so I'm glad Congress structured the takeover the way they did. Like you said- if they're going to do it, it needs to be done with the good of the people picking up the bill in mind.
Another point too many people have missed is the potential (though certainly not guaranteed) depreciation of the dollar. If the government is going to buy up hundreds of billions in bad mortgage debt securities or the trillions of dollars in outstanding credit default swaps, they have to provide more money. They can borrow (but will only get outrageous terms given the current situation) or print more money. Printing more money will cause the money available to depreciate. This may or may not happen, but is a distinct possibility at a time when the dollar is already very weak.
Just my 2 cents. I agree with Janelle. It was well written. If we could just replace the money jockeys and "economic pundits" on Yahoo Finance, CNN, FOX NEWS, and my local stations with smart, simple commentary and analysis like yours I'd be in heaven.
The title really doesn't have anything to do with the article. Sometimes, I just like to put random things up. No reason.
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