On The Proposed Bailout

CNN has a story about the proposed $700,000,000,000 bailout of the financial industry. There’s a great quote in there:

Paulson said that the bailout plan is the only way to unfreeze financial markets, giving firms the confidence they need to start lending to one another once again.

Y’know what? I’m not sure I want them to be confident right now. They shouldn’t be confident. They should have the same insecurities about decision-making that we all do right now, mostly because it was their bad decision-making that caused this mess in the first place. Sure, you can point to people who borrowed more on mortgages than they could reasonably pay back, but the counterpoint to that argument is that these lenders lent money they should have known couldn’t be paid back, or they bought mortgages from lenders without investigating fully the thing it was they were buying.
At the end of the day, the corporations gambled on their ability to predict the future and came up short.
If corporations get a free do-over, at taxpayer expense, then I for one am fully in favor of Phil Hellmuth walking into the Treasury Department, saying, “I flopped a set of Queens, and some idiot who didn’t know the odds held on until the river and cracked my set with a straight. I got busted out of the tournament and lost my $50,000 entrance fee. Can I have a check, please?”
Because that’s EXACTLY the same goddamned thing. These corporations gambled and they gambled badly. If they don’t suffer, they will not learn a damned thing other than “we’re considered too important to ACTUALLY lose money, so we can gamble however we want to and the taxpayers will come in and cover our losses… but obviously, we don’t share our wins with the taxpayer.”
Yes, it will mean tough times if these companies are allowed to fail. We need tough times.
My grandparents’ generation lived through a Depression. An honest to goodness “I’ll work for food” depression. They learned the importance of savings. They learned to save up for what they wanted to buy before they bought it, and the only debt most of them carried was a mortgage.
We’ve grown soft since then — and make no mistake I count myself in that “we”. We’ve accumulated far more per-capita debt than ever. Our annual personal savings figure has declined to the point where, each year, we save negative money. Why shouldn’t we live on deficit spending? The government’s been doing it for years with no problems….
Let the economy fail. And my generation, and the generation to come will grow up with the hard lesson that apparently needs to be re-taught every so often, on how to handle their finances.

4 thoughts on “On The Proposed Bailout

  1. You know, I have to ask the question. Who’s making money off of this? That mortgage debt isn’t worthless, it has the property value associated with it. Even if it deflates 50%, a $400k house last year is 200k now. And with most real estate bubbles, that property values doesn’t evaporate forever. Look at Hong Kong and Tokyo which has survived many housing bubbles.
    I don’t think the economy would fail. Easy credit would disappear (and still may, at least for the stupid). I would have thought the dot-com bubble would have foiled the stupidest investors, but it didn’t.

  2. Actually, it’s more like going all in on with a gut shot straight draw and losing to a set of queens when it missed. The Banks aren’t busting out on bad beats, they are busting out because they gambled, knowing that they didn’t have the cards.

  3. The only banks failing are the big ones who, as you said, hedged big and missed. Those banks I really won’t miss too much, mostly because they pitched themselves as safe investments without the oversight of a normal bank on the street corner.
    So far, the tightening in the small/mids markets hasn’t happened. I don’t know if this is a result of the oncoming bailout or because the fundamentals are still sound ( I lean towards the latter). Rich people will still loan money to companies because it makes them more money than sticking it in a mattress. Honestly, I think the only companies that are scared of the ones who screwed themselves.
    When telecom failed, the government stayed the hell out of it. Now we have a stronger sector that is profitable.
    Airlines? Bailed their sorry asses out. Now, we have another mess brewing in the same sector only five years later.
    Auto Manufacturing? Wait five years and see how similar it will be to the airline industry.
    Financial Services? Frak, just wait two for that one.

  4. If the Fed wanted to intervene at all, by adding liquidity to the market, here’s what they’d do:
    (1) make a “for show” investment in FDIC and up the limits, to increase confidence in consumer deposits. This should stop a lot of the bank running that forced WaMu under (note, I don’t care that banks fail, but it’s better if they can find buyers and not get forced by the FDIC). The hope is that this money would never actually get used for anything, and thus not actually leave the hands of the Fed.
    (2) pick out the banks that are still healthy — the ones that didn’t screw up — and make large deposits into them, with interest. As any one who took (and understood) Economy 101 will tell you, when you increase the deposit reserve of a bank (by depositing money), it increases the amount of funds that they can use to lend. This would add liquidity to the market by allowing the secure banks to start making loans again. And for the tax payer, it does not cost a dime, since the money is a deposit, and will be reclaimed by the Fed with interest. Again, stress, this is not a hand out or bail out, it’s an investment by the Fed.

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