Why the Bailout is the Wrong Move

First of all, the “Emergency Economic Stabilization Act of 2008” is incredibly short-sighted and frankly, terrible policy. The first version that was voted down by the House last Monday failed to make the significant changes necessary to address the true problems. After revising it (read: filling it with pork) the Senate passed the “new and improved” bill in a landslide and the House followed suit Friday with a smaller majority. I don’t know about you, but I’m FURIOUS. The members of both houses of Congress who voted for this bill deserve to be put on trial for treason and jailed. These people have NO shame, much less a soul to speak of.

The bill the Senate voted on is a bloated 451 pages. One third is related to granting the Treasury the powers requested by Secretary Paulson. The new authority is opaque and grants the government far too much more power. There’s an inherent problem with the Treasury buying majority stakes in any private company and essentially, that is what Division A of this bill outlines.

This is wrong for several reasons.

The bailout rewards managers and executives who made bad decisions. The essential aspect of a free-market is the opportunity to fail. Lost in the finger pointing by Democrats and the President that this is a “failure of the free-market” is one simple truth: capitalism without failure is like religion without Hell. Those who took imprudent risks should now be forced to bear the weight and responsibility of their decisions. The risk of failure and bankruptcy encourages smart decision making and wise, cautious investing.

The bailout will encourage reckless behavior in the future. Anyone who has taken psychology 101 has learned the differences between positive and negative reinforcement. A bailout for the companies in trouble is a sign to them and others that daddy government will always be there. Wall Street is throwing a tantrum in the checkout aisle of Giant Eagle right now. Do we give in and encourage more whining when they don’t get what they want? If you are a member of Congress, President Bush, Chairman Bernanke, or Secretary Paulson, that answer is ‘yes’. This is dangerous policy because first, it’s un-Constitutional and second, where do we now draw the line for others who come asking for their bailout? Once the government says yes to one group it becomes incredibly difficult for them to justify saying no to anyone else. California has already learned this lesson with Governor Schwarzenegger already asking for a $7 billion loan.

The bailout is bad for the economy. Unfortunately, bad government policy overextended the housing sector in our economy. Capital and labor have saturated this area and we’re seeing the readjustment now. This bill is an attempt to re-inflate the bubble that was artificially blown up by government in the first place. By not letting the housing market correct and re-allocate labor and capital to the rest of the economy, our growth is hindered. Short-term we won’t see much effect of this. However, due to the great power of compounding over time, small changes in the rate of growth could result in a severe impact on standard of living for ordinary Americans. Small differences in growth rates are what amount to large amounts of disposable income in the United States that separates us from other developed countries that interfere regularly in their economies.

The bailout ignores history. There have plenty of historical examples of the negative consequences of governments trying to prop up a deflating bubble in any sector. Japan suffered severe stagnation and lost the entire decade of the 1990’s by trying what we are doing right now. The state of California has itself gone through several real estate bubbles and subsequent bursts in the past sixty years. This is more to do with zoning restrictions on home construction but regardless, the market is allowed to readjust, albeit to a false floor. At the beginning of the millennium however, we allowed the technology bubble to explode and readjust. Today the survivors are stronger and more correctly valued and the technology industry has done well following the purge.

The bailout will increase corruption in Washington. Lord knows we need more of that but it will be a certain result of this bill. Giving the government even more power over the economic decisions of the people will only lead to even more lobbyists and lawyers advocating on the behalf of companies and banks looking for favors and privileges. The mess that is Fannie Mae and Freddie Mac was allowed to continue because they gave extraordinary amounts of money to politicians. It’s no surprise the recipients of the most money fought efforts to reform Fannie and Freddie earlier in the decade. It’s also no coincidence that the same Congressmen who worked so hard to fight oversight led the charge to pass this bill.

While everything the “Troubled Asset Relief Program” (TARP) stands for is bad for the economy, Congress couldn’t help themselves and, true to form, loaded the remaining two thirds of the bill with pork and tax breaks for politically expedient recipients. Someone please explain to me why, in this situation Congress felt it necessary to include a “transportation fringe benefit to bicycle commuters.” There’s also $1.5 million appropriated for the National Academy of Sciences to “identify the types of and specific tax provisions that have the largest effects on carbon and other greenhouse gas emissions and to estimate the magnitude of those effects.” I wish I was making this up; it’s on page 180.

I was at the dentist last weekend and was informed I have a cavity. I couldn’t figure out why; I brush all the time, floss, and don’t eat lots of sugar. Then it hit me, I’ve been gritting and grinding my teeth so much that I wore down the enamel. It reminded me of an old adage, “Five minutes’ thought would have sufficed to solve this problem. But thinking hurts, and five minutes is a long time.” So to those who have now developed ulcers, chronic migraines, lockjaw, arthritis, or any other erosional malady due to the incompetence of our “leaders,” take heart. We can always ask for a bailout.

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One response to “Why the Bailout is the Wrong Move

  1. Michael Tsai

    Very well-written and researched, good job.

    My initial impression of you 3 years ago is further confirmed.