It now looks as though chances are slim to none that taxpayers will have to foot the bill to clean up the financial mess left in the wake of the subprime mortgage meltdown. Although we are currently in a desperate financial crisis, and something should be done, it is absolutely nonsensical for the taxpayers to take the falll for a disaster that was not even our fault in the first place. Common sense tells us that if we don't learn from the mistakes of history, history is bounf to repeat itself. For Congress to have approved such a plan would have commenced a repeat of FDR's disastrous New Deal legislation (part of which was the creation of Fannie Mae in the first place), which may have provided some temporary help, but ultimately led to decades of massive government regulation and suffocation of the free market and free enterprise system, culminating in a near economic collapse by the end of the 1970's. At that time, inflation and interest rates had skyrocked to record levels, and anyone who was alive during the 1970's cab tell you about the fuel crsis we experienced back then. Had we not elected Ronald Reagan in 1980 to take a hacksaw to all of this government regulation and control, our economy indeed might have completely collapsed. We oughjt to know better by now that bigger government and excessive regulation doesn't solve problems. On the contrary, it exacerbates them. In fact, as I will explain later, it was one instance of such regulation, enacted into law during the Carter administration, and capitalized upon by the Clinton administration, that ultimately led to the mess which we now find ourselves in, and which the Democrats insist will be solved by even MORE regulation (when regulation they supported led to this fiasco in the first place) and by saddling taxpayers with the bill.
Here are some reasons, consistent with fundamental economic principles, that a govenment bailout, no matter how dire the need, is a horrible idea that would, just like New Deal programs, lead to an even more massive crisis:
1.) America was designed to operate as, and should always operate as, a capitalist, FREE MARKET economy. That means than rather than micromanage the markets with excessive regulation, the government needs to "back off" and allow the natural rules of the market to operate. One of these natural rules is that the greater potential for return on an investment, the greater the risk. Individuals and investment banks who were "betting the farm" on these bonds and securities backed by subprime loans should have known the risks they were taking, and that this artificial "mortgage boom" would eventually go bust. Some scrupulous financiers knew of the impending doom, so they passed around these bonds and securites like a "hot potato" by unloading such risky investments, all ythe while making a nice, handsome profit for themselves by doing so. Those who were left holding them when the subprime mortgages started defaulting ended up getting screwed, but that was ultimately their own fault. Just because the "hot potato" gets thrown to you does not mean you need to catch it, or even touch it. In this case, people should have ducked as far down as possible and gotten out of the way. Any investment involves risk, and the greater the potential for profit, the greater the risk. These are simple rules of a free market economy, and our govenment has no business interfering with them. Throughout history, all centrally planned, socialist-leaning economies have failed both completely and miserably. The market needs to be allowed to run itself, and sometimes shit happens, but that will make people and the banks accountable and teach them to invest more wisely and conservatively the next time. On the other hand, when big brother interferes, no one learns their lesson and we're bound to have another crisis before long
I've been investing since I was 19 years old, when my late grandfather gave me a generous financial gift under the condition that I invest at least half of it and take it upon myself to learn how to invest money wisely. I clearly remember one of the last conversations I had with my grandfather less than a year before his death in early 2007. Even with his health deteriorating, he gathered the strength to shake his finger in my face and say, "Casey, don't you DARE invest a cent in anything back by this subprime mortgage stuff. Shit is gonna hit the fan big time, and I only pray the Lord takes me before that happens." Lucky for grandpa, his prayers were answered, and lucky for me, I steered clear of the bad investments he warned me about.
2.) Speaking of accountability, what message does it send that good old Uncle Sam will be there to bail you out when things go sour? In an era of extreme fiscal IRRESPONSIBILTY in Corporate America, corporations will hardly see the need to make sweeping changes in the way they do things if they know they can always depend on the federal governement to save them from an ultimate fate. Shareholders will not put enough pressure on company executives to be more fiscally responsible for this exact same reason.
Why should distressed corporations receive such special treatment? Does the government ever do this for individuals or families? When a family is going broke because dad blew thousands of dollars at the casino, and mom maxxed out the credit cards at the mall, and as a result the kids have no health insurance and are going hungry, does the government ever step in and offer that family a "bailout" ? Of course not. Why should corporations guilty of financial mismanagement on an even GREATER scale be afforded this privilege. We need more fiscal accountability in corporate america, and "Wall Street Welfare" will completely retard this at a time we need it the most.
3.) Furthermore, and perhaps most disturbimg, had this proposed "bailout" packaged passed, it would have given our government a majority ownership interest in what are supposed to be publicly-held companies. Say good-bye to capitalism, say hello to socialism. At first, I thought that there would be nothing wrong with this as long as, once the company was back on track, the government would IMMEDIATELY liquidate its interest in the company and turn complete control back over to provate shareholders where it belongs. However, our federal government for years has been obsessed with the entire "money is power" mentality. If our government pumps all of this money into distressed corporations, the government will say it only makes sense that it gets to run the company and "call the shots." And even when the federal government could liquidate its interests, once it has enjoyed its privilege of running these corporations for so long according its own agenda, do you really think the government will be eager to all or the sudden "cash out" so quickly? Even if they do, is there a guarantee that even a cent of the government's profits will be returned to its own "shareholders," the American taxpayers? Anyone who honestly thinks that would happen is seriously deluded.
The argument has been made, even by President Bush himself, that even though government interference in the markets is not exactly desirable, it is necessary at present as a "last resort" due to the extreme risk that massive corporate failures would pose to our nation's entire economic structure, as well as the economic structure of other capitalist nations that depend on the strength of our markets for their own economic well-being. There is definitely some truth to this argument, which is why several in the GOP have proposed an alternate "bailout" plan that would not cost one cent of taxpayer money.
Rather than a "bailout," this plan would have instead, according to today's edition of Investor's Business Daily, created a government insurance fund for troubled assets. Who would pay the premiums? By golly, it would be the very financial firms that own these assets! The greater the risk of the assets held, the higher the premiums (this is an example of GOOD regulation that would make the firms think twice before deciding which assets to take on). Other highlights of the alternate plan are as follows:
-Corporate tax breaks and EASED regulation (like the Liberals would ever go for either) would have allowed private capital "off the sidelines" and to be drawn into the market by removing the burdensome, Democrat backed regulations and tax obstacles which currently impede the formation of such private capital. There is a MAMMOTH amount of private capital out there in our country and in the world (think Sultan of Brunei, Bill Gates, Warren Buffett, Carlos Slim, Boone Pickens, Michael Milken, even OPRAH!), and many owners of that capital would be more than willing to provide it to save our economy were it not for so many regulations and obstacles getting in the way. Yet, the Democrats still have the gall to insist that MORE regulation will solve the current crisis?
-Fannie Mae and Freddie Mac would be barred from repackaging "unsound" mortgages as securities. In other words, if Fannie and Freddie choose to back a mortgage, they get stuck with it permanently; no more hot potato!
-The plan also allows much stricter SEC audits of failed companies. Had such a policy been in place, it is very unlikely that Fannie and Freddie, back in 2003, would have been able to overstate company earnings by over TEN BILLION DOLLARS to boost the size of bonuses for their top executives. By the way, aren't former execs from companies like Enron and Worldcom currently sitting in federal prison a similar type of fraud?
At the same time, former Fannie Mae CEO Frank Raines is serving as a top advisor to Barack Obama's presidential campaign. Perhaps Mr. Raines knows, deep down, that he is "up the creek" and that his only hope of avoiding criminal charges is an Obama victory, followed by an Obama promise (if it hasn't been made already) that as president, his justice department won't pursue criminal charges against him and his other former cronies at Fannie and Freddie. Mr. Raines probably also assumes that the $125,000 Senate campaign contribution that Fannie made to Obama (second highest to any Senate campaign) will grant him automatic immunity.
If true, this is absolute corruption, both at the corporate and political levels, at the grandest of all scales!
Also keep in mind a rather snide comment Raines made to Fannie Mae shareholders in 1999 (who have since lost practically their entire investment after Raines walked away with nearly $100 million when he left Fannie in 2005 before "shit hit the fan") :
"We manage our political risk with the same intensity that we manage our credit and interest rate risks."
As today's IBD article further points out, "Fannie and Freddie were created by Democrats, regulated by Democrats, largely run by Democrats, and protected by Democrats. That's why taxpayers are now being asked for 700 billion dollars."
However, since the taxpayer funded "bailout" will likely not become a reality, much to the chagrin of Democrats, we as taxpayers will not be forced by the federal government to clean up this mess that we did not even create.
House Speaker Nancy Pelosi and Senator Harry Reid can point their fingers at the Republicans all they want for today's events. This is indeed ironic, because if the bailout plan was not doomed to fail already, Pelosi pretty much sealed its fate when she made downright insipid and self-serving partisan comments right before the plan went to vote.
Pelosi and Reid (who actually make President Bush seem competent in comparison with their antics as of late) also conveniently forget that it was Liberal Democrat-sponsored legislation and regulations that practically provided Fannie and Freddie with a "free pass" and paved the way for this economic crisis.
More on that in the next blog . . . In the meantime, I think I'll buy an expensive bottle of wine to celebrate, now that I know I won't need to fork over the money to cover our nation's economic losses =)
Cheers,
Casey
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