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Monday, September 29, 2008

The "Humpty Dumpty" Bailout Plan

I was not surprised when Secretary Paulson said he had no plans to use the bailout money for the very things he said he would. In fact, he said there would be a disaster if he did not get money to buy bad loans, now he refuses to buy them. It is also not surprising that he insisted that there be no accountability in the bill. There are trillions of dollars of money being secretively spent with no accountability. This is, as Newt Gingrich recently said, "simply un-American."

Humpty Dumpty's origin is in English history. He is a character used throughout history to describe greedy Kings who squander other people's resources so that they can behave irresponsibly, till they fall off the wall, and no resources can "put them back together again." It is fitting that this analogy be used to describe today's "Kings."

Originally, the House rejected the so-called bank “bail-out” bill, until 150 billions dollars of pork was put into it. This bailout was a tremendous spit in the face to this country. The corruption is no longer secretive; it is flagrant. I refer readers to my "Article of the Day" section which lists a number of articles which tell the story of the bailout corruption.

Why should one type of business get bailed out, when others do not? Why should we allow the government officials to pick favorites like this? If I wreck my truck, the government does not pay my loans - that is a risk that the banks took on me based on my credit worthiness, and if I fail, then that risk did not pay off. However, if I were a bank investing in mortgages it would not matter - I could just walk away and the bank would get tax dollars to pay off the loan.

These banks failed under a set of actions, which were done to prevent the very failures which occurred. They told us we needed a central bank, government backed loans, housing bills and other goodies to prevent recessions. Now they want to increase these actions to deal with the effects which did not prevent the failures to start with.

The stock market is supposed to be risky - that is what keeps it in check. Investors investigate the risk, and do not invest in un-sound companies. However, the government wants to reduce that risk, and replace it with government regulators. They do not realize that the regulators give a false sense of reduced risk by saying "do not worry about it, we are making sure these companies are sound." It is no surprise then, that the investors turn to the regulators to compensate them when the investment turns out to be as risky as it was before the government stepped in. Why should we taxpayers compenstate them, because they depended on the government to do thier job for them and failed?

There are plenty of other reasons to despise this bill. First, even the bill’s supporters said they didn’t know if it would work. Secondly, it included numerous provisions which were blatantly unconstitutional. Third, there are so many conflicts of interest on this thing, that it is (as Congressman Paul Ryan described it) "a stinking cow-pie with a marshmallow in the middle."

It was intended to bailout individuals who did a poor job managing their companies. Not that this was unexpected. They colluded with government officials to centralize the banking system, which ran the competition (small banks) out of business and gave tremendous oligopoly power to a few big bankers, while distorting their business incentives. They turned to the government for profit, rather than their customers. Now they turn to the government to bail them out with our money. This has happened many times in history and is not unexpected. All Bernake's economic models, and Paulson's plans cannot put this Humpty Dumpty back together again.

As Newt Gingrich said – the bill is simply un-American. He should have went a step further to say that this is an extension of a banking system, that is highly un-American. Most people would never tolerate this system if they knew about it. Henry Ford said, and it is still true: “It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

For years, I have cringed as I heard commentators talk about how good the economy was. I knew, as do most Austrian Economics adherents, that the economy was being propped up by government intervention. No economy can survive in the long term on a foundation of politically driven government subsidies, centrally managed inflation and banking, and high taxes. These things stimulate the economy in the short-term, but cannot be sustained without imposing a higher and higher burden on development over time. It is called "Keynesian Economics," and it only works in the short run, never in the long run.

As Adam Smith taught us, an economy must provide freedom for individuals and basic oversight in order to grow. Government cannot grow an economy in the long run, because it’s incentive structure is not built to do such. Interest rates will always be either too low or too high. Also, government revenue is derived from force and coercion – not in exchange for providing a service or product. The U.S. government has figured this out, and has used these economic principles to grow the economy. The growth was so strong, that the government could tax the economy heavily, and still get away with it. However, the government has gotten greedy – as to all human beings when they are given instant gratification. Government officials enjoyed the benefits of trading favors with the banking industry, and they wanted more, till they got to the point where they wanted to out-right purchase the banks.

These bankers, government officials and investors (by the way, Henry Paulson and Ben Bernake are chief among them) are spoiled brats. As such, they do as all spoiled brats do – they turn to their masters for more money, more support and more of the spoliation which destroyed them. It is hard to say “no” and to make the child sleep on the street till he gets his own job – but the pocket-book must be cut off at some point. The child must learn through either a long-term proper upbringing, or a sudden crisis as an adult. We already let this brat grow up without proper upbringing – so there is only one other option. This Humpty Dumpty thought he could dance on the wall all he wanted to, take all the risk he wanted to, and we would always catch him.

The sad thing is that many innocent people must be deprived of what they thought were sound investments. All brats bring others down with them. However, we are spoiled too, and must be taught the same lesson. Maybe we will know better, and teach our children not to trust the government to take care of us from cradle to grave. Maybe we will teach them that there is only one type of responsibility, and that is personal responsibility. Taking care of others is very important in life, but that cannot be allowed to become spoiling.

The baby-boomer generation is about to learn this over the next couple decades. The banking system is the beginning of a domino of failures expected in medicare, social security and all the other welfare programs. If we had a free market, these things may not be automatic – it is hard to bring a child up the proper way. However, these programs would be cheaper and more accessible, just like any market-driven consumer product.

However, I see the point in individual welfare – at least there is a good intention there. I don’t oppose individual welfare nearly as much as I oppose corporate welfare. Nothing is more repugnant in a free society than to deprive people of their personal resources to line the pockets of the politically well-connected. That is the real problem here.

Throughout the development of any economy, there comes a time for contraction. Excess in an economy is checked by recession. The fear of falling victim to a recession is what keeps investors in check – regulation from government officials simply cannot have this effect. Real recessions are not a bad thing – they create a buyer’s market and they clean the economy of bad investments. They are usually short and painless. However, the government has prevented recession through inflation for so long, that they exacerbated the effects. Artificial government-caused recessions like this one are a bad thing because they drive the government to behave even more irresponsibly. Their answer to put Humpty Dumpty back together again is to get more nets to catch him when he falls. However, if he were allowed to fall, there would be pain, but he might stop dancing on walls. This is what worked in the early Reagan Administration, and what will work today.

The answer is to let these banks fail and attack the long term problem – centralized banking. There would be a short term recession, but in the long term, the banks, investors and customers will all learn to take responsibility for themselves.

1 comment:

Michael Ejercito said...

The only bailout necessary is to ensure that funds are available for withdrawal from FDIC-insured accounts.