Monday, November 17, 2008

Bailout Mania in America

First the American taxpayer bails out AIG, and then Wall Street/Banking/Financial System itself, and now the Big Three Automakers are asking for one, and will likely get it if President-elect Obama and a Democratic-controlled Congress have any say. By the way, since when are Democrats in favor of corporate welfare? I thought that was exactly the sort of thing that everyone from Michael Moore to Joe Lieberman were staunchly against.

I don't believe the American public in general is getting a balanced diet of information on what exactly the consequences of bailing out failing companies will do to our economy long-term. Big Media continues to spread the idea that we face imminent economic catastrophe if we do not rescue any corporate CEO who asks for a little help. One word you never here uttered is inflation. How do you think the government is paying for this? Well, let me introduce you to a little something called the Federal Reserve. Fed Chairman Ben Bernanke, and Treasury Secretary Henry Paulson seem to believe that printing more $ to pay for these bailouts is completely necessary and therefore ignore any potential long-term affects of such an action.

Injecting capital directly into banks, as a big chunk of the infamous $700 billion bailout is now being used for, which by the way was not the original play laid out by Paulson. His first ingenious idea was to buy up bad debt from mortgage and insurance firms and hold onto them until the market returns to normal, and then hopefully sell them for a profit, giving the taxpayer something in return for their "investment." Nevermind the fact that in the meantime inflation would dramatically increase, thus negating any gains that would have been made if the plan succeeded. The new plan is meant to increase liquidity, relieving the credit crunch so banks and individuals are able to have access to loans again. Unfortunately, there is no sign the $ already being spent in this manner is having any affect. Furthermore, this same strategy has been utilized in Japan, yet their economy has remained stagnant for the last 15 years!

The last I checked, Socialism has largely proven itself a failed economic policy time and time again throughout 20th century history. Unlike, Nazi Germany to Communist Cuba and many countries in between, the leading economic powers of the past century have sustained a stable society based on capitalism, as defined by Adam Smith. Interestingly, Joseph Schumpeter's "Creative Destruction" process explains how the modern free market works very nicely, despite his reluctant conclusion that socialism would ultimately replace capitalism.

In any case, these bailouts must stop somewhere, because we are simply pushing our problems further down the road and placing an even bigger burden on future generations.