Everyone in every town of every state is asking one question, “What are we going to do about the national crisis?” Everybody and their dog is freaking out because they fear we will be headed toward another Great Depression. It seems as though every time our government tries to bring our country out of debt, it only gets worse. We are supposed to be a capitalist nation, which can mean that we can bring ourselves out of debt by letting the market be. So what do we do? Nothing. I will explain.
For most of this essay, I will be talking about bailing out banks that we have all heard of and have seen on the news. What exactly goes on in a bank bailout? When the government or the Federal Reserve sees that a bank has debts that it cannot necessarily pay off, it will buy mortgages backed securities that are in danger of defaulting. Here is the major issue I have: the banks that were bailed out are too big to fail. Unless someone from the bank purposely mishandles funds for the sake of their own benefit, such as what happened with Kenneth Lay and other employees that worked for Enron, the large banks will be ok to stand on their own.
There are a few main problems with bailouts. The first one is that large banks are anticipating that the government will step in and help them out of a crisis when it is necessary. This can cause a couple of problems. One of them is that the banks can become so heavily reliant on the government that it is likely that the bank itself will not try to save itself. Secondly, with this anticipation, it can warp the amount and pricing of funding that creditors will provide to a bank that is too big to fail. This can lead to the bank taking excessive risks and can make poor use of their financial capital.
Another problem is that banks have now become too large and complex. This definitely makes it more difficult for policy makers to predict fallout from banks and will refuse to provide good enough coverage to uninsured creditors. Yes, the banks these are very large and very complex, which is why bailout money is not needed. Especially since we know that giving bailout money may not be so great in the long run. Yes, it does stop people from freaking out at the time the too large to fail bank might close, but it just increase our budget deficit that people of our generation will have to pay for in the near future.
One more major issue on the bailouts is that people who work for failing banks get away with millions of dollars for supposedly doing their job, when it was their fault the bank was failing in the first place. Incentives for the executives? Give me a break. Talk about creating a deficit…wow.
I have addressed many problems, and I bet you are asking yourselves, “When is this rambler going to get to the issue on how to solve the crisis that we have?” I should not have to say it, because I myself think it is pretty self explanatory. We are supposed to be a capitalist country, which means having a free market with very little government control. Therein lies the problem; our government is doing too much. That was indeed my entire point of talking about bailouts. Everyone is asking the question, “What should we do? What can we do to pull ourselves out of the situation?”
The answer to those questions is plain and simple: nothing. Let me clarify what I mean by nothing; the government needs to stop helping banks and needs to allow the market to run itself. Our country has led the economic world for years because of the free market economy system that we have. Once a bank or a business fails, a new and upcoming bank or business will take its place. That is how it has been, and without a doubt, how it should be. Banks that are too big to fail need to be left alone. Sure, every bank and business will fluctuate and look somewhat bad at some point, but the banks that are too big to fail will either correct themselves or the market will punish them.
Bailouts are not at all needed and our government needs to step out of the way and allow the market to act on its own. It seems like every time our economy looks better, our government steps in and tries to help, but only makes it worse. So, from now on, when someone on T.V., radio show, or even a press conference asks the question, “What are we going to do?” Everyone should say and agree, “Make the government step out of the way. They should let our economy go as a free market, and do zip-diddly-squat.”
“Too Big To Fail: The Hazards of Bank Bailouts.” Mineapolisfed.org. December, 2003.