So now Paulson and Bernanke are working with Congress to create a government entity to take all the bad debt off of the books of banks and financial institutions. Naturally, the stock market shot up 400 points yesterday on the news.
The casino stays open.
It is impossible to overstate the implications of the moral hazard here. Though the government will undoubtedly buy the junk at discounted rates (they better), the U.S. taxpayer will be on the hook for the fallout. So as the housing market returns to mean (as it will) the government will be stuck with all the bad sub-prime mortgages created in the last few years.
Lord only knows what else they’re going to take.
I have had mixed feelings about the ongoing economic crisis in this sense: although I am opposed to bailouts in general, I’ve supported the moves of the Fed and the Treasury because they seemed necessary to forestall an economic apocalypse worse than the Great Depression. That is still the case.
However, I feel this is one step too far. Some of these companies must be left to fail. Bear, Lehman, WaMu, and others should not be saved from their rapacious greed. Fannie and Freddie, yes. AIG…I’m still not convinced, but I see the point.
The bottom line here is this: There are no serious consequences for this kind of failure. Sure there will be layoffs (mostly of people who had nothing to do with these failures), but the men who are responsible will walk away wealthy and unscathed. The entities that they helped ruin will have learned only that they can take every risk. They have nothing to lose and everything to gain.
Needless to say, this bailout cannot pass Congress without a series of strict regulations to protect against this kind of epic failure again. New regulations are essential for banks, investment firms, insurance companies, mortgage brokers, et al. The unfettered free market, left to its own devices, would have (and still may) destroy this country. If there was ever an indictment of GOP policies, this is it. Watching McCain flail around in response to this disaster would be comical if it wasn’t so serious and sad.
And there is still a giant red elephant in the room. Putting aside that our economy will be in tatters in 2009-2010 (consumer debt in massive default, unemployment in double digits, inflation, and so on), there is still the matter of our national debt. $10 trillion and counting without including Fannie and Freddie, loans to the Fed, loans to the FDIC, and this newly announced mother of all bailouts.
Who, the question must be asked, will bailout the ultimate institution that is too big to fail?
At what point do America’s finances become a liability? At what point is our debt downgraded? At what point does the rest of the world simply stop lending to us? At what point does America default?
America is truly too big to fail. But with irresponsible GOP governments, we’ve taken on so much debt that the possibility is real.
Again. We’ve never saved for our rainy day and now it’s pouring.
The government keeps opening a bunch of cheap umbrellas and the wind is blowing hard.
Unless the world bails us out (which they would likely do, but you never know) there is no shelter.
The biggest bailout in U.S. history is still to come.