Government Bail out fails – That's a good thing
Yesterday was most likely one of those days that will go down in economic history. US lawmakers rejected the proposed Government bail out yesterday. As a result, the Dow suffered the biggest single day point drop in history. The Dow Jones industrial average lost 777.68, surpassing the 684.81 loss on Sept. 17, 2001, which was the first trading day after September 11th.
Why the panic? Fear that Congress might not be able to come up with a fix to the nearly frozen credit markets. Frozen markets mean that banks hoard cash which makes it difficult for businesses and individuals to get loans. While an inconvenience to individuals for businesses this can mean not being able to continue day-to-day operations. Businesses of all types depend on these loans and lines of credit to keep their businesses running and to make payroll while waiting for incoming payments.
What does all of this mean?
Well, I no even close to being a financial expert, so to answer this one I’ll defer to the experts which at this point are divided. Some are shouting complete economic failure, others say the economy will hold it’s own for now. The economists predicting failure base their prediction on a downward cyclical spiral. Banks hoard cash and make it difficult for businesses to get loans, this causes some companies highly reliant on credit to not be able to operate or make payroll. This results in job loss and people not being able to pay their bills. Those bills are what allows companies to pay of their existing credit. See the pattern?
Others though are a little more positive. They say credit lines for the most part are already out there and banks can’t genreally just pull them away. They argue businesses can survive a credit squeeze as long as consumer spending remains positive – which it has.
The Government bail out package
The Government bail out package is basically a piece of legislation designed to prevent a potential economic meltdown of the US Economy. The bills intent was to get banks lending again. How? By letting the US Government buy up the banks troubled debt caused primarily by the crash of the US Housing market. When I read this, I’m reminded of something I hear Dave Ramsey say. Dave often slams people for taking out home equity lines to payoff their credit card debt, especially when they say “paid off”. He quickly corrects them saying “You didn’t pay it off, you just moved it”.
Allowing the US Government to buy our banks troubled debt just moves the debt, it doesn’t get rid of it. But I am getting ahead of myself. The bail out package as proposed to the house on Monday provided the following key provisions:
Staged distribution: The $700 billion would be disbursed in stages, with $250 billion made available immediately for the Treasury’s use.
Repayment from banks: If for some reason the Government ends up with a net loss, the bill says the president must propose legislation to recoup money from the financial industry if the rescue plan results in net losses to taxpayers five years after the plan is enacted.
Treasury ownership in companies: The Treasury would be allowed to take ownership stakes in participating companies.
Stemming foreclosures: The bill calls for the government, as an owner of a large number of mortgage securities, to exert influence on loan servicers to modify more troubled loans.
Limiting executive pay: Limitations would be placed on the compensation of executives at companies that sell mortgage assets to the Treasury. Among them, companies that participate will not be able to deduct the salary they pay to executives above $500,000. They also will not be allowed to write new contracts that allow for “golden parachutes” for their top 5 executives if they are fired or the company goes belly up. But the executives’ current contracts, which may include golden parachutes, would still stand.
Overseeing the program: The bill would establish two government oversight boards. A congressional oversight panel would be charged with reviewing the state of financial markets, the regulatory system and the Treasury’s use of its authority under the rescue plan.
Insuring against losses: The Treasury must establish an insurance program – with risk-based premiums paid by the industry – to guarantee companies’ troubled assets, including mortgage-backed securities, purchased before March 14, 2008.
Bail out fail and I’m glad
I am sure I’ll get many people disagreeing with me, but I’m glad the bill failed. I don’t want the government bailing the market out. Our Government can’t even manage their own finances let alone those of the whole economy. By moving bad loans from the private industry into the government, they don’t go away and somebody will still have to pay for them. Who? Us and our children. Those bad loans will come out of our taxes, our children’s taxes, social security and a number of other different areas.
I certainly don’t want to scream socialism, but if it quakes like a duck…Our Government over the past few years has moving ever so slowly down the path of socialism. Talks of government health care, more government programs to provide for the needy, and how a complete bail out of an economic situation that frankly we as the American people got ourselves into it.
Note also in the bill I detailed above, that the line that says the Treasury can take ownership of companies. What? Now we potentially have legislation that allows our government to take ownership of privately held companies. I don’t know about you, but that scares me to death.
My vote is to allow the economy to play itself out with no government intervention. Sure, it might get a whole lot worse before it gets better, but in my opinion that is a far better option that giving our government even more control. The Citigroup purchase of Wachovia is a perfectly good example of a non-government solution. Wachovia saw a problem, and took steps to rectify it.
Thaddeus McCotter, R-Mich., said it best when he said the bill posed a choice between the loss of prosperity in the short term or economic freedom in the long term. He said once the federal government enters the financial marketplace, it will not leave. “The choice is stark,” he said. I agree.
What are your thoughts? Add a comment!