September 29, 2008

Why This Layman Opposes the Bailout

I'm no economist, but the proposed bailout of Wall Street sounds like a bad idea. Maybe that's why it was defeated in the House of Representatives today. Basic psychology dictates that if you want to change people's behavior, you must punish bad behavior and reward good behavior. The bailout would do the opposite. It would reward bankers, investment bankers, mortgage lenders, and those on Wall Street, many of whom lobbied successfully for looser lending laws with no regulatory oversight and then took advantage of those laws to make risky loans when they knew better (pocketing billions of dollars along the way) with a giant taxpayer dollar party.

I don't get why these malfeasors should be rewarded. Apparently, they used creative financing products to lend money to home buyers who couldn't really afford the loans, and those home buyers have defaulted on their mortgages, sticking the lenders with bad debt. If we bail those lenders out, what's to stop them from going out and driving us into the ditch all over again? We're told that the bailout is about perception, that, somehow, giving the bankers all this money will "calm the credit markets." Those who favor the bailout say that, if banks are too afraid to lend each other money, more banks will fail, businesses will not be able to get loans, the whole economy will be brought to a standstill, and we'll have a recession or even a depression.

First of all, most Americans think that we're in a recession already. Second, we'll have a recession (or a deeper one) next year no matter what. Third, so what if more banks fail? Depositors' money is insured by the federal government via the Federal Deposit Insurance Corporation. That safeguard was put in place during the Great Depression specifically to avoid another one. If the banks ran their business poorly, let them fail. If you start a business and made bad decisions, would the government bail you out or would it let you fail? Isn't that capitalism?

Moreover, the bailout is the ultimate "top-down" economic stimulus, rewarding Wall Street fat cats who have made millions of dollars. We've already had a nearly trillion dollar top-down stimulus for military contractors, oil companies, and other friends of the Bush Administration. It's called the Iraq War. Now it's time to avoid a depression by a bottom-up stimulus. How about giving money directly to the homeowners who are about to default on their mortgages, so they can negotiate with their lenders to pay the mortgages? Wouldn't that avert the financial crisis all by itself? How about putting the money into our infrastructure, building roads and bridges that are in serious disrepair? That will have the secondary effect of giving people jobs and money that they can spend to help the economy. How about a government program to retrofit homes and buildings to make them more energy efficient? This will create more jobs, help out the building contractors, stimulate the companies involved in efficient energy, and make us less dependent on oil.

There are many ways to spend hundreds of billions of taxpayer dollars to help our economy. I'm sure I'm being overly simplistic, but my gut tells me that giving the bailout to the fat cats who got us into this very mess is the most unfair and least effective way to do it.

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At 1:40 AM, Blogger globalchameleon said...

Very good ideas, very well explained - you should "suspend" your activities this week and help out Paulsen et. al. on the Hill

At 3:44 AM, Blogger anOCgirl said...

i am no economist, but you explained your opposition to the bailout so clearly. this is a great post. i'm glad they didn't pass the bailout package yesterday. i too am opposed to giving wall street a $700 billion blank check for behaving badly.

At 6:21 AM, Anonymous Anonymous said...

Two things happened...

1) Your government failed you in several ways, but for argument's sake, it failed you by not explaining the real problem.
2) You didn't take it upon yourself to really understand the issue.

This is not a bailout of the "fat cats" on Wall St. It's a bailout of the American economy. If banks continue to feel the pressure they do and they continue to pull back on lending, the economy will become extremely stagnant. For instance, some companies will not have access to short-term credit, some of which is used for payrolls. You can't pay people, you must lay them off. People get layed off, it doesn't matter whether you give them some cash to help pay the mortgage in the short term. They'll eventually default anyway because they're unemployed. I could go on, but I won't.

In the end, you're right that the banks screwed up and the government screwed up, but we're all screwed because of it. First you have to stop the bleeding, then you can and MUST address the bigger problems. It pains me that the American public isn't taking the time to understand this important principle before speaking up against any form of bailout.

At 6:31 AM, Blogger Phil said...

If we had invested in wonderful "Acai Berry" and it's magic healing powers, the U.S. would not be in this mess.

At 10:09 AM, Blogger media concepts said...

i have thoughts -- you may be exactly right. But if I don't fully understand the problem, then there must be millions of Americans who don't either. Don't the people who proposed the bailout have some responsibility to explain its necessity to us clearly? I don't think they have done so.

And your mention of people being laid off only reinforces my point that a different, bottom-up type of bailout may be needed to create jobs and bail out the American economy. I'm just a caveman, but it seems to me that the bailout as proposed would primarily create and save jobs of the Wall Street kittens (since you don't like the term "fat cats") who got us into this mess.

At 10:24 AM, Anonymous Anonymous said...

Exactly my first point. The government failed the American public by not fully explaining the issue. Bush tried last week, but he didn't do that great of a job...go figure.

I actually think that a bailout plan is needed with, like you point out, additional programs to add jobs to the economy. If the consumers can't spend and other countries aren't buying our goods/services, then the government has to spend. It sounds crazy considering our deficit, but it is exactly what was done during the great depression.

At 8:00 PM, Blogger Barbara said...

Well now I'm really confused. All day long I have been thinking evil thoughts about those from both parties who defeated this bill and sent the stock market into a further decline.

There must be well-schooled economists who can divorce themselves from selfish interests and define what should and must be done.

I'm willing to listen to a non-political expert who really understands this, because obviously I do not.

At 6:02 AM, Anonymous Anonymous said...

Great interview with Warren Buffett. Might help explain to you what's going on.


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