Tuesday, October 24th, 2017

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What Is the Bailout Supposed to Do?

What’s this bailout supposed to do? We’ve heard about making credit more available, but what does that really mean?

Actually, I believe that the misguided attempt to bail out the banks caused the economic "crisis." In order to "sell" a package to give money to banks that got in to trouble because of their speculative practices (for which they had already been handsomely rewarded) President Bush and his economic advisors announced that there was a crisis.

Then it became a priority to get the economy back "on track." But it isn’t really sensible to believe that you can fix something that went bad by doing more of what made it go bad in the first place. The investing public knows that. It was dumbfounded as it watched (and continues to watch) the U.S. government engaging in practices that are remarkably similar to the outrageous practices that brought down more than a few financial institutions and started this whirlpool.

Policy-makers are relying on the very same economic advice that supported the "Masters of the Universe" who relied on wild speculation and unsustainable growth. Instead of applying some belt tightening and restoring sound fiscal policy, they have abandoned reason and are offering wild bailouts and indiscriminate taxpayer relief.

Nowhere do you hear an explanation of what they are attempting to accomplish. Restoring credit is the catchall. By that, they must mean that they want to make it easier for those who are not worthy of credit to get credit. Isn’t that a bad thing? People and businesses that can show that they can repay debt are not having trouble getting credit.

The problem is that the United States is itself quickly moving toward insolvency–and most rational people are very concerned about it. The money that will be spent to "fix" the banks and support taxpayers (who may or may not deserve to be supported) may not be available to support important public services or to pay for food stamps and relief should the need arise. That money will already have been spent to support the bankers and the middle classes with money to spend on things that they don’t need–all in the name of saving jobs by "jump-starting" the economy.

It appears that governance is being provided by people who "learn" what they are supposed to believe–instead of thinking for themselves. They are buying into the idea that economic policy is some arcane discipline that they can’t hope to master. Actually, if they can master their household budget, they should be able to figure out that you can’t spend yourself into solvency. Quite the contrary! As a group, are policy-makers simply not as smart as most ordinary people?


Markets move in cycles. When it’s time for a slowdown, a slowdown will come–regardless of whether the U.S. Treasury is solvent or bankrupt. The bursting of the housing bubble brought the mortgage lenders who relied on continued growth to their knees. There needed to be capitulation in order for greed and mismanagement at those banks to stop.

But the economic advisors–mostly bankers–would not accept that. Paulson might truly believe that a failure at some big banks would be the end of the world. However, most of us don’t agree. I didn’t. My October 2008 column was titled "The Sky Won’t Fall." I hoped that our voice, and the voices of millions of other thoughtful people, would give pause for reflection. It seems almost inconceivable that the outcome we are experiencing would not have been seriously considered–or even anticipated.

Until President Bush’s bailout became law, the markets were relatively stable. The acceleration of the upheaval seems to have been a result of that bailout. The investing public is too smart to buy into the idea that what is needed is more spending. They know that the party has to end and it doesn’t want to get back on "track" if that track calls for excessive borrowing and spending.

Treasuries are the preferred security right now, with people and governments willing to give their money to the Treasury for practically no return. This condition is not likely to continue. Where will the money come from and why would anyone lend to a debtor country at unfavorable rates? More likely, we will have to offer higher interest (much higher) to attract lenders. A better solution would be to reduce spending and to increase taxes on income in excess of a certain amount. High-income people will be rewarded with having helped the U.S. economy survive. Warren Buffett and Bill Gates seem to endorse this idea! The performance of the stock market is evidence that investors don’t have confidence in the current proposals for "saving" the economy.

The problem with the President’s mortgage relief plan is that it doesn’t address the root cause. For whatever reason, people bought homes that they could not afford. Many of these "victims" will always struggle to make their mortgage payments (and, likely, those on their credit card debt), no matter how much the government helps them to refinance. Rather than "helping" those people to remain in their current homes (prolonging their struggles), the government would serve them better by allowing them to come to terms with the need to live within their means. The point is: We can all agree on the need for subsidized housing for the needy–but we don’t want to be forced to support the greedy.

On the other hand, the provision of the stimulus act that gives a tax credit to homebuyers could produce very worthwhile results. While this credit is not widely discussed, it provides incentives that could easily spur home sales in 2009.

If homebuyers become motivated, real estate prices might stabilize or even move up. Homeowners who make these sales may be able to trade up to larger places, if they need more room, or relocate to find new jobs.

What’s more, each home sale can have a broader economic impact. There’ll be work for painters, landscapers, and other contractors. Retailers may benefit, as some new homeowners will buy furniture and furnishings. Money will be spent-and spent domestically-helping the economy shift into higher gear.
Legislation to remove the requirement that the homeowner must be buying a home for the first time or not have owned a home for the previous three years would make the credit available to more potential homebuyers.

With such an incentive, come spring, people might decide to take advantage of the tax credit to do something good for themselves (their family members) and for their country–and go house hunting!

Check out finance.youngmoney.com/drips

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