Close

December 11, 2008

Five Ponderings on the Massive Federal Bailouts

In my opinion, after the recent massive financial bailouts and other interventionist federal actions (and in some cases nationalizations) within our economy (i.e. the private sector), several pressing questions remain unanswered. I have been pondering on five of them for some time now. These are listed below in no apparent order.

1. If bad loans got us into this situation, then why is there so much effort to get banks to loan even more money?

If there is a dollar to be made and people are free to act in rational ways, then somebody creative will find a way to earn that dollar. My thinking is that in spite of the negative news regarding financial markets right now, there remains a market for loaning money to people with good credit. If this is the case, then there must be people willing to make a profit in such a market and so they will loan money to those with the means to pay them back. No crisis there.

On the other hand, the market for people with bad credit (i.e. people who you shouldn’t loan money to) has dried up and rightfully so. That should be a good thing. It made no sense to make risky loans but such actions were encouraged by foolish government policy that distorted reality and created an artificial market for bad loans. No loans to people who should not get loans means no crisis there either.

So let’s fast forward to now. I want to know why there is all the fuss about banks not loaning money then? It’s good banks are not making more bad loans. To push them to loan on a large scale again seems to me to further push us into the mud. We’re supposed to be getting ourselves “unstuck” but loaning more would seem to do just the opposite and compound our already bad situation. That doesn’t make a bit of sense.

2. Bailouts rewards bad performance.

Corporate leaders are paid to lead. Part of leading means avoiding problems. It seems to me that we have a bunch of bad leaders at many financial institutions (and in government) since they led their companies (and federal policy) on a path of suicide. Why should the government reward these guys with a bailout? Seems to me that such actions simply reward their poor judgment and punish those who kept their companies out of trouble.

As for the auto industry in particular, I have some specific thoughts along these lines. They were on an unsustainable path by operating at a loss and piling up debt for so long. Instead of cutting back, rethinking, retooling, living within their means and building products that customers want (and will turn a profit), they were unwilling to change. A bailout will just put off the invevitable and reward their past negatives. Where is the incentive to adjust to market forces and make an honest profit by pleasing customers like all other businesses have to do? Furthermore, a bailout invites the government to meddle within an essential American industry. That’s an incredibly dangerous proposition.

3. Bankruptcy and subsequent restructuring allows serious change to occur quickly.

Bankruptcy can give a company temporary relief while forcing hard decisions to be made and implemented under court order. In some cases, ownership changes as assets are sold or even repossessed. Physical assets, however, don’t disappear just because ownership changes. In most cases of high profile companies, ownership changes don’t kill the company. Just because ownership or the company name changes doesn’t mean the demand for that type of product ends. Good news! That means, then, there is still a market for those products.

Think again of the American auto industry. If General Motors were to go bankrupt, the demand for vehicles would not cease. Somebody would still build cars in most of those General Motors factories. The other companies could not step in overnight and build enough cars, trucks and parts to meet consumer demand. That means there is still a huge market for, and thus incentive, to keep General Motors alive.

If left alone, I predict that instead of collapse, bankruptcy and much-needed restructuring would occur within the American auto industry. The result would be an industry that is much stronger and more competitive for the future after undergoing the tough decisions needed now.

4. We’re on a slippery slope to socialism and nationalization (i.e. communism).

I alluded to this thought above. I don’t like the federal government taking taxpayer money (or borrowing money that taxpayers will have to repay) and “buying” or assuming ownership of private companies or even parts of them. I see no Constitutional authority for such a move and it is highly contrary to the tenets of capitalism.

This economic downturn is not a problem with capitalism. Instead, it is a problem caused by government interference that distorted free markets by preventing them from properly regulating themselves and rooting out bad loans and risky behavior. In short, government created this problem and now we’re asking government to fix it? How foolish is that?

5. Finally, why have certain leaders not been fired for their incompetence?

We have a Treasury Secretary that serves at the will and pleasure of the President. There are leaders in Congress that oversee financial committees and other influential boards and administrative bodies. Corporations and banks have leaders. Surely these leaders should have seen this problem coming years ago. After all, they are paid to prevent problems such as this.

The very fact that so many of our leaders, from the Treasury Secretary down to corporate executives, either didn’t see the problems or failed to warn of them makes these individuals part of the problem. Instead, and making the case even worse, it seems many of these leaders contributed greatly to the problem. That scenario suggests they are guilty of inept leadership. Simply put, they are incompetent.

In short, those incompetent individuals who contributed to this problem should be fired and replaced with competent individuals who will work to get their companies and our country out of debt and on a solid financial footing. I’m troubled that I can think of nobody who has been fired for their part in creating this problem. Instead, they are awarded billions to spend and authorized with questionable powers to “fix” what they either helped create or failed to avert. That response seems about as reasonable as giving gas and matches to an arsonist.

So, in conclusion, these five ponderings have occupied a great deal of my thought (and frustration) over the past few months. Please share your ponderings below.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.