Wednesday, October 1, 2008

The Senate will be voting on the new version of the Bailout Bill this evening. The Senate has added a few good items to the bill (increasing FDIC insurance is one) and removed a couple of bad (ACORN ain’t getting paid), but it is still a bailout. Our .gov has to stop bailing out poorly run companies and institutions. Bailouts are counter productive and basically just postpone the inevitable.

We already have the means to deal with companies and individuals who have made bad investments or overextended their capitol. If an individual or a company can not meet their financial obligations, they have the ability to petition the bankruptcy courts for relief.

From CNN:

By Jeffrey A. Miron

…The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This “moral hazard” generates enormous distortions in an economy’s allocation of its financial resources.

Go ahead, click on the link and read the whole thing. The author knows what he is talking about.

“Jeffrey A. Miron is senior lecturer in economics at Harvard University. A Libertarian, he was one of 166 academic economists who signed a letter to congressional leaders last week opposing the government bailout plan.”

The Senate has not yet voted, there is still a chance to squelch this horrendous piece of legislation right now.

“But JR, the credit markets will dry up”. Well, isn’t it the loose credit markets that are the problem? Wouldn’t tightening up the credit markets be a good thing? At the end of 2006, total credit market debt was $44.549 Trillion. The United Stated GDP was only $13.450 Trillion. The credit market debt was over 3.3 times our GDP. Yes, credit debt helps to drive GDP, but this large a debt to GDP ratio is just insane. A bailout will not correct the underlying problem, it’s like buying your alcoholic brother in law a case of Budweiser just to keep him from visiting over the weekend.

If you want to see some of the shenanigans involved in the new bailout bill, head on over toe HotAir and read Senate bailout bill hits the Internet.

If you want to know what the .gov can do to fix the economy, you will just have to wait. I have a lawn that needs mowing. Priorities you know.

I should thank Rush Limbaugh for the heads up on Mr. Miron’s article.