While Wall Street got high Monday on the government’s plan to bail out banks and while everyone cheered the apparent reversal in market psychology, no one has stopped to consider whether the plan will really achieve its long-term objective – restoring our economy and putting us back on the track to prosperity. My prediction is that, not only is this plan doomed to fail but, even worse, it will create additional problems.
The stated purpose of the plan is to inject liquidity into the financial system, freeing it up to begin lending once again. The problem was not that credit had completely seized up, but that only those who were credit-worthy were able to access it – people with decent incomes and collateral, which is the way things are supposed to be. But in today’s economic climate, following decades of declining incomes, that’s not enough to keep the economy humming at a pace that sustains an illusion of prosperity for everyone. So the idea is to pump money back into the banks so that they can resume making loans to those who couldn’t otherwise qualify.
In other words, the goal of the plan is to restore the status quo – the way things were before the wave of mortgage defaults started. Without increasing the demand for labor and thus restoring income growth, it’s easy to predict that another wave of defaults will ensue. And without addressing the trade deficit, the root cause of job losses and falling incomes, it’s easy to predict how long this $700 billion bail-out will last. Since the trade deficit continues to drain $700 billion from our economy each year, this bail-out may last just one year.
In only one year we’ll be right back in the same boat, needing to inject another trillion dollars or so into the economy. What then? Will we do more of the same – buy more bank shares? It’s like trying to keep a leaky boat afloat by running the bilge pump full speed. Unless you stop the leak, the bilge pump will fail when the boat runs out of fuel. We’ll never be able to keep putting money back into the economy as fast as it’s being sucked out by the trade deficit.
Beyond that, there are additional problems. If you are an investor, how can you possibly trust the financial statements of the bank? The bank now has even less motivation to properly value the loans it’s made. What’s the point? The government is there to back them up anyway. In fact, it’s now to the bank’s advantage to make as many risky loans as possible. It’s free money!
On the other hand, if you’re an investor evaluating companies in which to invest, why would you ever invest in anything other than a bank into which the government is plowing your tax money? Your investment there is completely risk free. It’s impossible for the bank to fail. Won’t this tend to suck investments away from other companies that need the capital?
And speaking of your tax money, why should the government even pretend to care about fiscal responsibility and budget deficits? It has just shown that it can materialize money out of thin air, and everyone is happier for it. Why not just spend more and more and just keep printing more money? You may say that eventually the interest on the national debt alone will exceed all federal revenue. Who cares? Just print more money to pay the interest and then, next year, print even more! For that matter, why even bother to collect any taxes at all? That would boost the economy even more and, besides, the government can just print the money that it would have collected from you and me!
And speaking of you and me, the voters, why should we ever listen again to any candidate who speaks of balancing the budget or fiscal responsibility? Why would we vote for anyone who doesn’t promise to shower us with more and more money?
And, for that matter, why should any of us bother to work hard and save, since the banks are there to lend us money regardless of our ability to repay it? Besides, it doesn’t matter if we repay it. The bank doesn’t care. The government will repay it.
And why should any of us pay attention when politicians talk about social security and medicare becoming insolvent? Hell, just print more money!
For that matter, why not just cut out the middle man and send everyone free software they can use to print money at home?
Perhaps I am being a bit facetious but, frankly, I’d feel equally silly telling you that this bail-out is just a one time thing and no one will ever expect the government to bail them out again. The precedent has been set. Next time, more will be expected. Then more. It’s difficult to see where this will end. It’s lazy economics and it will only breed more laziness. Why would our national leaders ever work hard to solve economic problems again when you can just pick up the phone and tell the Fed or the Treasury to crank out another bail-out plan and print more money?
The United States has just snorted its first “economic crack.” Can we yet rehabilitate ourselves or have we taken the first step in an irreversible descent into economic madness?