Tuesday, October 14, 2008

The "Plan" Keeps Getting Better

Today, it was announced that there was a change to the government bailout plan.  The new plan calls for the government to, instead of buying bad assets, to inject NEW capital into the banks by obtaining equity stakes in exchange for the money.

Now, while this plan is actually slightly better than the old one, it still is pretty bad and in fact maybe worse in the long run for the country.  Here is my big problem with the plan.  We live in a capitalistic society.  This is a good thing.  The cornerstone of any captialistic society is the banking system.  Banks are the ones with capital. They put the capital in Capitalism.  The antithesis of capitalism is government run enterprise, socialism.

Now while this plan doesn't actually give control of the banking sector to the government, it is a step in that direction.  And all it takes is one little step, and another one, and before you know it we have government controlling that entire sector.  The plan is similar to the one Warren Buffet got earlier, just worse.  The hope is that this injection of money will spur banks to start the lending the is so important to the proper running of the economy.  But even if this plan succeeds in the short term, it has scary implications in the long term.

Government is notoriously inefficient.  It is scary to think that we would put the model of inefficiency over the very institutions that need to be the most efficient.  Banks need to base their decisions on profit motives.  However selfish and non-humanitarian that sounds, it is vital to the proper running of an economy.  Banks need to provide capital to those who will best deploy it.  Don't believe me?  Look what caused this financial crisis.   The housing crisis was caused when GOVERNMENT decided that it was a good idea to start lending to people with poor credit histories and who could not afford their payments.

Now what will happen if we let government start having a say in who should get capital and who shouldn't?  What happens the next time it is decided to help those who don't deserve it.  Maybe it determines that the failing American car industry needs to be saved, and the banks should lend it money.  How can we prevent the people who run the banks not to curry to their employers and owners, the American government?  We can't.  Nor can we prevent this from going past a "temporary" solution.  Too many times, "temporary" fixes become permanent.

I get their will be pain.  I get we might have a recession.  But really, should we be transferring taxpayer money to corporations that took huge risk and lost?  Does that seem fair?


  1. You have to remember that these government officials want to do whatever they can short-term so that they can get re-elected. They have to be able to put something on their slogan stickers. It's the salesman mentality. It's not their problem if it's not on their clock!

  2. [...] everyone into giving him almost unlimited control over a vast amount of money, he announced he was changing tactics and going a different way.  Instead of buying all the assets of banks, they would inject new capital into banks by taking an [...]