Personal Finance Blog by Debit versus Credit

When Will The Bailouts End?

September 18, 2008 | Filed in: Miscellaneous | 3 comments

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Maybe it’s just me, but these bailouts seem to be happening more and more frequently these days. Six months ago it was Bear Stearns. Just two weeks ago we bailed out Fannie Mae and Freddie Mac. Now, as you’ve undoubtedly heard, the U.S. government has taken it upon itself to bail out American International Group, otherwise known as AIG. What was their reasoning this time around? What does this mean to us as taxpayers? Will the bailouts ever end? These are all questions that you have probably found yourself asking. I’d like to attempt to answer them for you.

Why Did We Bailout An Insurance Company?

To be fair AIG is involved in more than just insurance.  That is, however, their primary business.  Unfortunately they have had large levels of exposure to the credit crisis through an insurance-like product that protects the purchasers of the product from bond defaults.  Essentially they insured investments.  As so many of these investments are going south so is the cash of AIG as they are forced to pay out to their customers.  The problem lies therefore with their current level of capital.  They were unable to raise enough in time and their credit ratings were dropped.  This may have forced them to declare bankruptcy because they did not have enough cash coming in.  The fed stopped this though by offering an $85 billion dollar loan and agreed to taking an 80% stake in the company.  Essentially they just bought AIG.

Will This Affect Our Taxes?

More than likely this will not have an impact on our taxes.  But it may.  There’s something that a lot of American’s don’t know about the Fed and our government.  They have been running a budget deficit for a LONG time.  That much is common knowledge.  But think about it.  Where did they get the $85 billion to loan to AIG?  It wasn’t sitting in a vault somewhere twiddling its thumbs.  That much is for sure.  No.  When the government needs money they print it.  Just out of thin air.  They fire up the money machine and call it cash.  Of course if I tried to do this I’d be arrested for counterfeiting.  They ought to be arrested for causing high inflation.

So rest assured this money did not come from our taxes.  It may not either.  If AIG can pull through this ok the Fed hopes to sell their portion of the company back to the general public, at a gain.  But that doesn’t help the damage that’s already been done.  The fact is that the Fed and the treasury have thrown billions upon billions of dollars into the economy.  Dollars that didn’t exist before.  Is it any wonder why gas costs so much?  It shouldn’t be.

When Will The Bailouts End?

I’ll be perfectly honest with you.  I was surprised when the Fed let Lehman file bankruptcy.  I was pleasantly surprised in fact.  Don’t get me wrong.  I feel terrible that such a large business with so many employees was allowed to fail.  But it has to happen.  We are supposed to have a free market system.  There will be ups and there will be downs.  Right now we’re facing some serious crisis’ on wall street and in the financial system as a whole.  Things will eventually get better, but in the meantime there will be pain and there will be losses.

Right now WaMu looks like it may be the next target for failure.  They’re currently shopping themselves around for a buyer.  Their problem is also a lack of capital.  Cash truly is king.  Like I’ve been telling all of you, make sure you have an emergency fund for when a crisis comes into your personal life.

On that note I don’t think we’ve seen the last of the bailouts.  The Fed and the Treasury department have been too forgiving and too quick to pull the trigger.  These companies more or less deserved what was coming to them.  I hope that these bailouts will not create an attitude of “we can’t fail” in companies.  I hope that our country will be stronger after this crisis.  Unfortunately it’s looking to be quite the opposite.

What are your thoughts?

Tags: AIG, Bailout Nation, Bear Stearns, Debt, Economy, Fannie Mae, Federal Reserve, Freddie Mac, Rants

What Happened To Free Enterprise?

July 30, 2008 | Filed in: Miscellaneous | 2 comments

Free Enterprise: an economic system in which private business operates in competition and largely free of state control.

What happened to the days when Free Enterprise reigned supreme and it was bad news when a government stepped in to take control?  Our nation is quickly becoming a “bailout nation.”  While many will argue that it is for the greater good that our government bail out companies such as Bear Stearns, Fannie Mae and Freddie Mac, they may ask themselves yet, where do we draw the line?  By bailing out failing financial companies are we sending the wrong message to business and also taxpayers?  I think we are.  I think that we’re essentially telling companies that if they’re large enough - important enough - that we will bail them out if they make mistakes and are in risk of going under.  After all if we’re willing to bail out Bear Stearns then why not anyone else with enough clout?

It Hurts The Taxpayer

As if it wasn’t bad enough that we’re sending the wrong message to big business it becomes worse when one stops to think about where the money to bail these companies out is coming from.  Last I checked our nation is running a huge deficit.  Impossibly huge, one might say.  The money sure isn’t coming from the U.S. savings account, because we don’t have one.  It’s coming from your pocket.  It’s coming from my pocket.  Maybe not directly, but you can be sure that this will affect us in the future.  The Fed’s magic money making machine of course will be what creates the money to bail these companies out.  They create money out of thin air, to use at their whim.  This of course is what’s providing us with the highest inflation rates in some time.  Of course that’s another day and another topic.  To stay on point essentially what will happen is that the fed will bail out these companies, creating an even larger budget deficit this year which will one day need to be payed off by us.  The taxpayer.

A Slippery Slope

It’s a slippery slope that we’re on right now.  Where should the line be drawn?  Is it better to bailout large financial firms in danger of failing and save ourselves from an even longer and more drawn out recession that will create financial difficulties in the future or is it better to let Free Enterprise reign and whatever happens, happens?  I prefer Free Enterprise.  We’re not a great nation because our history has been filled with bailout after bailout after bailout.  We’re a great nation because of our belief in Capitalism and Free Enterprise.  The further we move away from this, the greater danger we place ourselves in.  Stay on a slippery slope for too long and you’re bound to eventually slip and fall.  I hope to God that we don’t fall.

Tags: Bailout Nation, Free Enterprise

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