When I first heard about the proposed bailout, I was annoyed. I believe that those taking excessive risks with the hopes of earning excessive returns should be allowed to fail when said risks don't pan out. This is especially the case, when those doing so know better. I was further angered when I read that Treasury Secretary Henry Paulson wanted to include any bad debt (not just housing and mortgage-backed securites) in the plan. In this state, I pounded out a post stating my opposition to this bill and asked you to call your representatives and oppose it.
I am not usually an emotional person. I generally make rational decisions based on facts not on opinions, hearsay, or rhetoric. I don't know why I lowered my standards, but I did. I was sick, so perhaps my weakened physical state affected me mentally. That's probably just an excuse, but I'll cling to it for now.
Regardless, I spent a lot of time last week listening to experts discuss the problem and the implications of not passing this bill. While it is far more complex than what I am going to describe below, I will attempt to explain the basic problem, the two alternate solutions and why I now support this concept..
Fundamental Problem
Capitalism, of which I am a big fan, depends on capital. Right now, those who have capital are sitting on it. They have little or no intention of lending it to others because they do not know whether it will be repaid. With the rash of failures and the massive amount of uncertainty this is entirely understandable. Imagine that a friend comes to you and says, "I need help. I have $10,000 in gambling debts that I can't pay. Will you loan me $1,000?" Do you make the loan?
Free-Market Solution
The beauty of our economic system is that it not only accounts for failure but also provides incentives to overcome those failures. Consider this scenario. Two companies provide milk to your local grocery store. Because of the competition, milk costs $4.50 per gallon and the companies make little profit. In an effort to get ahead, one company starts giving excessive amounts of untested hormones to its cows. They get caught violating public health standards and go out of business. With no competition and increased demand, the second company is free to raise prices and milk now cost $6.00 / gallon. Because there is now huge profit potential, a third company opens and starts providing milk to the store. Eventually, the price declines back to $4.50 as supply-demand equilibrium returns.
Similarly, new lending institutions will form. They will start because demand for capital will drive the price to the point that there will be an opportunity for large profits. The problem is that this takes time that we do not have. Every day that projects are delayed or cancelled, that purchases are not made, that infrastructure declines is a day that puts us further into a hole.
Intervention Solution
I felt lousy last week. For days, I did little but sleep. I knew that I was sick, but thought I could take cold-medicine, sleep and fight this off without going to the doctor. On Friday, things took a turn for the worse and I realized professional-intervention was in order. I'm still sick, but I feel much better and am able to get out and do some work.
Our economy is currently sick and getting worse. In case you missed it, $1.2 Trillion dollars was lost in the stock market yesterday. This wasn't just Wall Street money, this wasn't money that supports the lifestyles of the rich and famous. This was your money and mine. This was retirement money, new car money, new house money, college education money, etc. This was ‘hopes and dreams' money.
So, if companies can't get loans to invest in new projects and individuals can't get loans to purchase new products, the economy stalls. If in addition, companies and individuals lose tremendous amounts of money that was saved for big purchases or rainy days, the economy nosedives.
Conclusion
As painful as this is for me to say, we need intervention. We need a bailout.
Comments(0)