Debit versus Credit

A wise man once said, “with great power comes great responsibility.”  Whether you are into Spider Man or not it’s hard to ignore such a profound statement, especially when the U.S. is facing times of great turmoil and our nations’ leaders are asking for unprecedented levels of power in order to shore up the financial system.

You may not realize it but the fate of our economy is essentially in a small number of hands right now, the most significant being Henry Paulson and Ben Bernanke.  These two men are pushing to pass a bill in Congress that will give the Department of the Treasury the power to form an entity that will be responsible for buying troubled assets from banks and other financial institutions.  By doing so they hope to free these financial institutions from their troubles and allow the banking system to continue to pump money into the struggling economy.  With a price tag of around $700 billion dollars this would be the mother of all government bailouts.

The question is, do we really need such an enormous bailout?  I’m of the opinion that we don’t and I’ll list for you here 5 reasons why we don’t.

1.  The big banks are hurting, but how realistic is it that they ALL fail?

Bank of America, Wells Fargo, Chase.  What do these banks all have in common?  They are some of the largest financial institutions in the United States.  They also all seem to have the cash to survive this credit crunch that we’re in.  If this bailout doesn’t pass we’re likely to lose some more banks.  Maybe not to bankruptcy, but there will be consolidation for sure.  Washington Mutual is in a shaky condition and may not be around in its current form a few years from now.  However to assume that without this bailout all banks are going to fail is completely preposterous.  That’s highly unlikely to happen, at least at this point.

2.  Most regional and local banks and credit unions are still in good condition.

The authorities seem to forget that the BofA’s and the WaMu’s of the world are not the only banks here in the U.S.  There is a huge system of credit unions and regional/local banks that have a huge marketshare of the available money here.  These banks and credit unions are often in much better conditions than their larger and national counterparts.  Sure a lot of the bank failures this year have been with these smaller banks, but it’s important to remember that the ones who took the most risks have failed and been absorbed already.  More is likely on the way, but overall these financial institutions have largely avoided the risky mortgage mess.

3.  Under the right (or wrong) circumstances such a large bailout could devastate the American Dollar.

The dollar has recovered a lot over the past few months.  The price of oil and other commodities is lower now than it was just a few months ago.  However this bailout will put a huge strain on the dollar because the government doesn’t have the cash just sitting around in a vault.  They’ll have to print money and they’ll have to sell debt.  This will put a lot of pressure on the dollar and unless other competing foreign economies collapse (the Euro zone, etc) the dollar will be heading lower.  This means we’ll be facing higher prices and increased inflation, as if it wasn’t bad enough already.

4.  It reeks of socialism.

A bailout of this magnitude reeks of socialism.  We’ll essentially be privatizing the mortgage asset industry and putting it completely under government control.  Now last time I checked we lived in nation that’s against socialism and for democracy and a market economy.  This bailout is exactly what we’ve fought so hard against since the founding of our great nation.

5.  The economy will eventually correct itself, without such drastic intervention.

I believe in the power of a free market.  I think that we’re facing a recession and things might be difficult for the next year or so.  However the economy always corrects itself and things always get better.  It’s a completely natural phenomena to have good years and bad years.  Why don’t we let things sort themselves out as they should?  If Mr. Greenspan would have done that earlier in the century we likely would not be facing this problem today.  Let the economy correct itself so we don’t risk making things worse somewhere down the line.

Henry Paulson and Ben Bernanke are asking for great power.  I am concerned about the level of responsibility being placed upon them.  I don’t think that they are acting in the best long-term interest of our country by promoting this bailout.  Therefore I don’t trust them to have such great power and great responsibility.  My advice is to let things work out naturally, just like they always have a tendancy to do.  What are your thoughts on the matter?  Are you for or against the bailout?