Financial Bailout Nonsense

Okay, okay, the big news lately is about the financial bailout package Congress and the President are trying to work out. In my opinion, this is a big mistake. We shouldn't be bailing out businesses for making bad business decisions, but letting them suffer the consequences of their actions. Instead, our government wants to make everybody pay for their mistakes. "They're too big to fail", they say. Nonsense, no company is too big to fail.

More importantly is how we got into this mess. Ultimately, it boils down to the Federal Reserve's policy of inflation and artificially low interest rates. By manipulating the money supply and keeping credit cheap, the markets were led into making business decisions that would not have been considered profitable at the true market interest rate.

The housing boom is a perfect example of this. Subprime mortgages would never have happened if lenders didn't have the support and guarantees of government to back them up. But they did, so they allowed people who really couldn't afford to buy houses to buy them, and put stress on the system when these people learned the hard way that they couldn't afford to buy houses. But why bail out the lenders? Why not bail out the homeowners directly? It still wouldn't be a good idea, but the fact that they don't do it goes to show who will actually benefit from the bailout--not the end consumers, but the financial firms who made the bad decisions.

Fannie Mae and Freddie Mac are GSE's that wouldn't even exist on a true free market. On a free market, businesses that make good business decisions are able to win more consumers (by satisfying them) and earning bigger profits that can be reinvested in the company to improve or expand the company. Businesses that make bad decisions end up losing money (i.e., they are failing to satisfy their customers), which tells them they need to make changes or else go out of business. The assets of businesses that go out of business are purchased by better-run businesses that then put those assets to better use. That's how it's supposed to work.

The bailout will reward businesses for bad decisions, and punish the better-run companies for not making the same bad decisions. The bailout will do that by the same means that got us into this mess in the first place: increasing the money supply and keeping interest rates artificially low. That's not going to fix the problem, merely prolong the problem. The market needs to correct for the bad business decisions, not prolong the bad business decisions.

The financial crisis is the direct result of government intervention in the economy, not capitalism, and the bailout is more government interventionism and will not solve the problem.

Of course, this is all my opinion and assertion. For more extensive information, check out "The Bailout Reader" at the Mises Institute website: http://mises.org/story/3128

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