Monday, September 29, 2008

Bailout bad or good?

Obviously it's on everyone's mind and there seems to be some very strong opinions about it. I've read a LOT of people who are against the bailout but I'm having a hard time understanding why there's so much resistance to the proposal (keep in mind I am NOT an economist). I get that there are those out there who believe a capital market should be left alone and not nationalized. I also get that there are those people out there who think those banks and institutions screwed up and therefore should pay for it. I also get (and very much agree with) the issue that compensation for the CEOs of these companies are ridiculous when they are "bought" out.

I understand all those points that people bring up but most seem to forget one major point and this doesn't even take into account the credit crunch/freeze that will happen if we don't do anything. The FDIC and Federal Reserve already have the right (and obligation) to deal with failed banks. The FDIC comes in as a bank fails, finds a healthy bank to take over the failed one, protects the deposits, and often takes over bad loans from the bank. Usually the FDIC has a reserve of money but that is FAST running out. This is their job and they will continue to do this as banks continue to fail. This is without Congress' approval or any oversight committee.

For the Citibank takeover of Wachovia, the FDIC is sharing the risk on a $312 billion portfolio of loans (without needing the express approval of Congress). They have already provided money for IndyMac, Freddie and Fannie Mac, and AIG failures, again without Congress' intervention. Without Congress and this bailout the FDIC and Federal Reserve is completely reactive, chasing after each failed bank and figuring out what to do with it, spending money it doesn't have (ultimately coming out of the taxpayer's pocket), and slowly running out of healthy banks for mergers. Getting the $700B from Congress with rules, regulations, and oversight committees will allow the FDIC and the Fed to be proactive and hopefully allow for transparency on the entire process. Until that happens, the FDIC and Fed will continue to bailout the failing financial industry and taxpayers will continue to pay for it. No matter what happens, the taxpayers will pay for this financial disaster. Wouldn't you prefer to have some limits, regulations, and committees making sure the money is used properly and something like this never happens again?

3 comments:

Ben said...

I think, for me, the problem is that there is still too much we do not know. From what I've read, financial services orgs (may) have a lot of bad paper literally hidden in their books, and they've not disclosed it yet. The fear, then, is that it's way more than $700B - closer, say, to $1T - and that despite all the bailout money, the entire economy could still collapse into a depression, only now it would wipe out the federal government, too. There just didn't seem to be a very thoughtful risk management approach applied, but rather a lot of knee-jerk reaction.

Edward said...

The problem is that that for the past 10 years there has been too much liquidity, causing asset bubbles (the tech bubble, the housing bubble, commodities) Each time one of these pops, the government reacts by pumping more liquidity into the system, alleviating the problem in the short term but making the next bubble even worse. In this case, there was too much money chasing safe investments so they started going after riskier investments. It seems odd to me that the solution to too much money lying around is to add another 700 billion of it to the pile.

timojhen said...

Agree with both Ben and Edward. The best thing I read on this was here (Nobel Prize winner in Economics) : http://tinyurl.com/4eg7yf .

In short, I'm not convinced that anything in the bailout plan as it went will change much long term.

Have been reading "I.O.U.S.A." (as quickly as I can stomach it). As a parent, I dread the country we're creating (and that my children will inherit). ...background info : http://www.pgpf.org/ )