Bail Out Bill and Credit Crisis

I've gotten a lot of petitions in my email and complaints from people about Congress writing a "blank check to Wall Street." This just pisses me off because it is so, so wrong. Most of the people sending this are liberals, which is odd because the Democrats are supporting it, it's the Republicans who are giving trouble.

Anyway this is not a check at all, it is the government buying distressed assets from companies that are having liquidity issues. The government may take an equity stake as well. They took 80% of AIG in exchange for a loan at 11.5% interest. If I had the $75 billion to loan them I would have done the same thing. That is a smart move.

The main complaint from these people seems to be that the bill is writing a check to Wall Street and ignoring "Main Street." This pisses me off even more. Who is going to suffer more from not being able to borrow any money - a rich Wall Street executive or the average people who need to buy stuff and run their businesses? If the firm fails, then the executive doesn't have a job, but he likely has the millions of dollars he has saved up. The average person is going to have their deposits insured by the FDIC, but people like me need to borrow money. I had $4,000 just in appliance and car repairs this month alone. If I didn't have a usable credit card with a semi-reasonable interest rate I would still have no car, no heat and no refrigerator.

Another complaint is about how the government is bailing out the lenders and not the borrowers who can't pay their mortgages. I have several problems with this statement. First off is what good is it going to do to help the borrowers if their banks fail? The second is a practical concern, which is that no bank is going to want to foreclose on a property and have the expense of maintaining a property which no one wants to buy? Even if people could get mortgages no one is buying real estate right now. The bank is going to have to pay taxes and maintenance on a home and they are going to lose cash flow.

If you are having problems paying your mortgage for god's sake please contact your bank. The government doesn't need to restructure your loans for you - the banks will do that. They would be stupid not to. Banks lose money every time they foreclose. They keep cash flow and liquid assets if they restructure a loan or provide some sort of relief to the borrower. Is that a difficult choice at all?

The government is not doing this to "bail out Wall Street." They are doing it to grease the wheels of the frozen credit markets to coax people into lending again. Lending is the cornerstone of the entire world economy. Without lending no one has capital to start businesses other than people who are already rich and things fall apart very quickly. Financially speaking, lending is how money is created and is the major financial tool for doing everything.

If the markets continue to stay frozen the banks are going to continue dropping off like flies, collapsing under the weight of their illiquid assets and their bad loans. Forget another Great Depression, this would be a complete collapse of the entire global economy.

The Federal Banks have already loosened the money supply and injected as much capital as they can and its not enough. Things are just that bad. The government needs to step in and do something or we are going back to a barter economy pretty soon. Anyway, the government is going to hold on to the assets they buy and eventually resell, likely at a profit. That's a smart move for anyone.