Bank Bailouts Are Wrong

I’m deeply bothered by the government response to bail out large corporate institutions and banks at taxpayer expense during the recent financial crisis. It makes zero sense why private failures on Wall Street should become a public burden.

At the risk of standing on my soapbox, I believe those who took the risks and benefited during the boom are the rightful owners of the losses when the bubble bursts – not the taxpayer – and it irks me to see it work the other way.

I understand the logic that allowing the failures would create more public pain than preventing them, but I disagree with that logic. The government can’t spend its way to prosperity, and it makes no financial sense to try and solve a problem caused by excessive credit and leverage by creating more credit and leverage and transferring that burden to the public sector.

The alternative is to allow a normal and healthy economic response that includes asset values declining to realistic valuations that are supported by the underlying fundamentals – not by government intervention and easy money policies. If failures occur along the way then so be it – that is the natural result of taking excessive risks and poor management. New companies will rise up to replace them.

Let me be clear – this asset deflation will not end until asset values decline to the point that their cash flows support valuations. This is basic investing and economics. Any governmental attempt to re-inflate values by incurring debt on behalf of the taxpayer is a waste of your money. It is merely transferring value from you (who never benefited from the speculative excesses) to bank bondholders and corporate shareholders. It is economically foolish and morally wrong.

My concern is the banking establishment has demonstrated way too much government connection by passing legislation favorable to its needs (at taxpayer expense) during this crisis. Our government representatives running the Treasury and Federal Reserve Banks appear to be unduly influenced with many coming directly from Wall Street firms (i.e. Government Sachs)

But who cares what I think? I’m just a small fish in the big pond of life. Let’s see what some people with credentials far greater than mine have to say on this subject…

“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” Thomas Jefferson

Whoa! That is one powerfully relevant quote from one of our founding fathers. Hmmm, maybe there is some problem with banking influence in government. Here is another interesting quote…

“Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.” George Washington

Hmmm, it appears these issues were well understood by the earliest American politicians. They warned us, yet we stepped into the muck anyway. Let’s see what some of the great economic minds of history have to say about bailing out the banks and corporations while putting our currency at risk…

“Lenin is said to have declared the best way to destroy the capitalistic system was to debauch the currency… Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million can diagnose.” John Maynard Keynes

Wow! Did I hear that right? The father of Keynesian economics espousing sound money practices. Can anyone say “quantitative easing”? Has anyone looked at the growth of the Federal Reserve balance sheet and examined the quality of the assets?

“With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people.” Frederic Bastiat

No surprises there, but thank you for the history lesson, Frederic. It appears our government is attempting to follow a well worn path. Since the creation of the Federal Reserve system the resulting currency inflation has destroyed 90% of the purchasing power of the dollar not once – but twice. In the 200 years prior to the Federal Reserve system there was no persistent inflation. The results are undeniable. I wonder how the captains of industry view our banking system?

“It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” Henry Ford

Enough said?

Again, I deeply dislike the government bailout of the banks and major corporations. It is the wrong path to travel and is taking us into dangerous territory. Learn more on this subject and maybe you can be part of the revolution Henry Ford talked about.

…but who cares what I think.