I don’t know, but it sure isn’t the Democrats or the Republicans. Today we hear Obama talking up hope of a new direction for the country and Jindal rebutting against “irresponsible” spending. But one thing is missing, neither is willing to punish those responsible. They want to prop up the system – all but conveniently forgetting that there is a lesson to be learned in the crisis.
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The Democrats want to literally keep printing money until the problem is resolved; meanwhile, the Republicans, with their newfound fiscal responsibility, want to return money to (selected) people. The Democrats want to keep borrowing and borrowing and spending and spending to salvage the economy; the Republicans want to let the free market takeover to adjust and correct the mistake. If these sound like some of the root causes of the economic meltdown in the first place, BINGO!
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The Democrats’ policy of deficit spending mirrors the American way of life. American people keeps borrowing and spending beyond their means – subprime mortgages with zero down, option ARMs, credit cards. And now the Democrats are pushing the national debt over $10 trillion and spending nearly $1.5 trillion to bail out banks and the economy. Although the plan will generate new jobs and help out distressed families, the price tag is staggering. In effect, the bailout plan is perpetrating wrong fiscal practice – and telling people that it is okay to spend without a though because the government got your back. This is NOT the message that the government should be preaching – instead, they should teach people to spend more wisely and save money.
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The Republicans, stung by the defeat in Congress and the presidential race, are now rallying around the principle of “fiscal responsibility”. Instead of cheering for massive government spending during the Bush era, now they are against government spending. At the same time, they want the public to trust them and let them hand the reins back to the free market economy. Let’s recap, the banking industry deregulation that began late-Clinton era and accelerated in the Bush era is a step toward free market economy. And the DJIA closed at its 12 year low on Monday – dialed back all 8 years of Bush and 4 years of Clinton economic policies. And now we should let the free market save us? The deregulation drove AIG, Lehman Brothers, Merrill Lynch, and numerous financial institutions to trade in unregulated Collateralized Debt Obligations (CDOs) and Credit Default Swaps (CDSs) that landed us in this liquidity crisis. Can we trust the free market to right its wrongs? I don’t think so, I am still trying to recover from their last big thing.
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One thing that both parties agree, is that they can’t let the economy or the banks fail. At the same time, they can’t nationalize the banks and wipe out investor money. The uncertainty led to investors to leave the failing banks and the stock market in droves, furthering driving down the market and forcing more banks to fail, making the need to bailout the economy all the more urgent.
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I’m no economist (in fact, I haven’t even taken a single Econ class in my life). But I know that we are suffering from a crisis of confidence, as any economists can tell you. The investors are nervous about losing money in stocks and in so, sold their stocks for safer investment, which perpetrated further market drops. The banks are nervous about lending money and losing money in the current portfolio and so hoarded money and refused lending to save themselves. The corporations are nervous about making investments due to lack of financing and need to provide shareholder profit, and in so they lay off employees in droves and defer R&D to save money. The American consumers are nervous about losing their jobs and consequently losing their ability of pay off debts and in so cut back spending on everything. And thus the cycle begins again.
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I have no grand plan to save the economy. But I know that I have a stable job and that I have the modest means to spend; and not to spend excessively but wisely within fiscal constraints. Which is why I am spending, and in a very little way, helping the market by giving it just a little bit more confidence.
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At the same time, I don’t believe we need the bailout of the banks. Companies make bad investments and should thus be punished for it. When other companies that made poor choices are forced to file bankruptcy, restructure, or liquidate, banks should be no different – just because they hold the key to our capitalistic society doesn’t mean they shouldn’t be held accountable for their myopic choices. Continuous investments into the banks while they continue to head down the drain is unacceptable – if the banks are so incapacitated to stem losses, then they should consider the option of voluntary nationalization. Numerous countries have nationalized banks at one point or another while the banks restructure and emerged with stronger banking systems. This option would wipe out investor value but the way I see it, the investors themselves are also perpetrator that drives the banks to make these bad decisions, and they too should share the burden of the punishment.
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In alternate universe where investors are confident about a revival and place their trust in the banks and the economy at large, we would not have to use the nationalization option and inject the bailout. At the same time, this revival should not rely entirely on the free market economy. Instead, with sensible and balanced regulations, the banks, the people, the government, and everyone else can learn to spend and invest more intelligently and help revive the economy. But until we learn to control our own avarice (it is one of the seven deadly sins, you know), we will keep jumping back into this macroeconomic cycle of booms and bust again and again. Sure we have learned not to blindly speculate on railroads, oil, dot-com businesses, real estate, and CDOs; but there are always something else new to speculate on and to that end, our unending greed is also our undoing. So, spend wisely and invest intelligently – Don’t buy into the hype and the myopia of short-term dividend payout – innovate and stay ahead and do what’s best for not just yourself, but for the economy, the country, and the world.
I am anti-bailout, anti-stimulus, and anti-saving-the-banks.
I also believe in the free market in general, while acknowledging market failures.
The problem is that the banking system we had was not a free market. The banks saw less regulation on what they did — true — but they never had to take more responsibility for their well-being. The FDIC insured that whatever they were doing, hapless depositors like me wouldn’t be affected, so I didn’t pay any attention to what WaMu was doing. In a world without the FDIC, I would have pulled my money out of WaMu and put it into a solvent bank before the day before WaMu collapsed. Falling deposits would have put a big incentive on WaMu and other risk-taking banks to clean up their act or get out of town.
The truth is, we developing a banking industry where the benefits went to the banks, their executives, and the stockholders, while the risk was socialized away to all of us. That gives banks a strong incentive to take risks that are too large, which is exactly what they happily did.
This is not the free market. In the free market, companies that make bad decisions fail; their stockholders are wiped out; and the risk of a company’s actions is held solely by the company and its stockholders. In our system, apparently, companies can be “too big to fail” which tells is another way of saying they can be as incompetent as they like and never face the music.
Don’t blame the free market. Blame the privatization of profit and the socialization of risk.
And it did – a bank run happened at WaMu, led to the takeover by FDIC which ended in a firesale to JPMorganChase. Don’t blame socialism – blame the entrenched nature of our government. Our elected government is elected by money – money that comes from Wall Street and not Main Street. So naturally they wouldn’t bite the hand that feed them. Clearly our government hasn’t done its job of punishing those who are responsible and tries to fix the situation by printing more money and taking on more debt. But I wouldn’t blame it all on some socialist conspiracy theory.
And guess where the bailout money come from? It’s from China, Hong Kong, Japan, South Korea, and a handful of other countries that have very high savings rate. Only a small portion of our government’s spending actually came from the taxes, the rest are issued as government bonds that are bought up by foreign governments and private investors. The whole talk about spending taxpayer money on the bailout is bull – the money is all from foreign governments in the form of U.S. government issued bonds. The load will remain on that bond holders so long as the U.S. remains a functional democracy and retains sizable military advantage over the rest of the world. Faith in the American economy and government is the backing of these bonds – unless our government does something incredibly stupid to cause people to lose faith in both – we may never have to bear to full brunt of the debt, nor will the next generation or the one after and so on.
Besides, there are also ways to annul these bonds to wipe debts off the table (hint: start a war with China or Japan). So you can rest assured that your share for the bailout is incredible minute and approaches zero dollar and zero cents.
For the record, I am not dissing the free market economy. In fact, I trust the free market economy. But one thing that I don’t trust is human nature – I don’t trust that people will do the right thing for the right reasons. The greed on Wall Street is what got us into the mess – it doesn’t matter if we completely deregulate the economy right now or before – as long as there is money to be made, history will repeat itself. It may not be CDOs or credit default swaps, but there will always be something else that people will exploit that are risky that will bring down the system. The free market system is a massive pyramid scheme – the top benefits the most while contributing the least while the bottom contributes the most while receiving the least benefits (if there is even benefits to be had). The free market economy works – but only if everyone knows and plays by the rule of the games and know how to do the right thing for the right reasons. Sadly, we won’t be humans if we all play by the book and do the right thing.
[...] I know I said that I have a stable job and would be spending money to do my bit to help the economy. I’m not reneging on that – I am going to be spending more wisely and not spending money that [...]