Sunday, September 21, 2008

Bailout Fallout

Spare the rod, spoil the child, the old saying goes. More simply put, it meant if you didn't punish your kid for screwing up, he wasn't going to learn anything from it. I was spanked hundreds of times growing up, and I don't don't think I was left with any permanent scarring. The phrase can be twisted into a new variant for today's economic times. Bail the corporations, fail the public.

Ok, it's not nearly as catchy, but it's not bad for a (so far) coffee- free Sunday morning. In just the past few weeks we've seen government bailouts of mortgage lenders Fanny Mae and Freddie Mac, as well as a huge loan given to insurer AIG in order for them to stay afloat. Government seems to be taking over institutions, and no one really seems to be that concerned about it. Certainly, my portfolio has benefitted over the past couple of days, as the stock market rallied on news that the government was planning on establishing a commission to prevent failures of companies like Freddie and Fanny and Lehman Brothers. So what's the big deal? Only time will tell. In the short term, though, our already huge national debt has doubled. Who's going to be responsible for balancing that out?

Figuring out why everything got so out of hand is simple. Banks and lending institutions made too many bad loans. I know of several people who either bought a house with an interest only loan, or simply with no money down whatsoever. Buying a house was now on a par with buying a flat screen TV. Imagine if you were constantly loaning money to people whom you weren't sure could pay you back. What would happen? You'd eventually run out of money. Yet the lending institutions were only too happy to do this practice, over and over again. Do you think the government would bail you out for giving money away without knowing whether you'd get it back or not? That's what's happening today with Fanny and Freddie.

I'm not a student of economics, but I don't like what I'm seeing with this constant stream of bailouts. People who live in hurricane country know full well that a storm could throw their home into the sea, and they most certainly know the government will be there to bail them out when it they can build in the same place all over again. The free market will always work things out if given the chance, and we're not seeing that here. If the government continues to bail out the financial institutions, there'll be no need for them to change their practices, and we'll see a continuation of the problems that got us where we are right now. There's no punishment for the wrongdoing.

Commit the crime, do the time. I always liked that one.

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