This commentary is written by a Harvard-educated Libertarian.


Commentary: Bankruptcy, not bailout, is the right answer

CAMBRIDGE, Massachusetts (CNN) -- Congress has balked at the Bush administration's proposed $700 billion bailout of Wall Street. Under this plan, the Treasury would have bought the "troubled assets" of financial institutions in an attempt to avoid economic meltdown.

This bailout was a terrible idea. Here's why.

The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.

Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.

This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.

Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.

The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources.

Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.

Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.

The costs of the bailout, moreover, are almost certainly being understated. The administration's claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.

If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.

The bailout has more problems. The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients.

Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take. The bailout will open the door to further federal meddling in financial markets.

So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.

The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer.

The opinions expressed in this commentary are solely those of the writer.

What about people who have pensions invested in Wall Street?

I hate the bailout (and it is a bailout), but wonder how many 'ordinary people' are going to be hurt. Maybe being hurt is being 'ordinary' now, eh?

Right now everything we have come to depend on is basically on life support. (Dependant on loans from other country's)

Pensions (401ks), Social Security, Medicare/Medicaid, along with any and every other form of welfare we will very likely be saying goodbye to in the not too distant future.

Our government is INSOLVENT. It is insolvent in a large part because of these very institutions they are now attempting to give more money too....money which we just simply do not have.

There is enough information out there that puts into a proper perspective just what and how dangerous the Federal Reserve really is. There is information out there giving, in explicit detail, how they snuck it in and how they have been stealing from us since its creation.

We at this time are in a "situation no win". To put in street slang. We are fucked.

Why are we in a "situation no win"? Because, the core of the problems are not being addressed.

It will be impossible for us to sustain for much longer, let alone add anything else such as Universal Healthcare which so many (myself included) think that we should have.

Some things have to happen if we are going to have a chance, and no matter what, things will have to get worse before they get better. If we do not make these changes, things will get worse only...I do not see them getting better.

Things that must change.

1. End the wars, bring back our troops from around the world.

There are multiple reasons that can be given for stopping this madness. Someone with a conscious will point to the killing, the destruction, the suffering, the horror of it all.

This is where I stand and to tell you the truth, since we refuse to end the wars and instead seem to be expanding them, I really do hope that this country go's belly up and reaps the rewards it deserves.

However, we are not talking about war in this context. We are talking about the financial aspect of war and the war machine. Trillions are being wasted.....thrown away. Trillions that we do not have. Trillions that are being taken out of our pockets and put into the pockets of the real rulers of this planet. Do you really think that our elected representatives are there representing us? They are nothing more than, puppets.

2. Abolish the Federal Reserve and it's PRIVATE monopoly over the control and creation of money. 1 and 2 are so closely related it was hard to decide on which should be put in the first spot. They are intermingled really. Perhaps this should be in the number one spot because of the control that it gives over every aspect of our economy but because of the suffering that war causes, it infuriates me.

Many if not most that I talk to outside of the forums do not understand that the Federal Reserve is a private entity. They just do not understand how this system works because they are uninformed. Once again, there is plenty of information out there if one desires to look.

3. Remove ourselves from all of these so called Free Trade Agreements.

We must bring back our manufacturing. This was the backbone of this country. This was creating something of value. The loss of our manufacturing base has been devastating to this country beyond description. Most of it has been outsourced to cheap/slave labor countries which is then sold to us.

The problem is that there is nothing created of value in this country. There is no inflow of cash, only an outflow.

We have turned into a service based economy. Lets see if we can look at how this works in a simple way.

I'm an electrician, so I will use this.

I go to your house and do some wiring work for you. You pay me xxx amount of dollars for my services. (Note: almost everything we use now in my trade is made in another country. This is an out flowing of money)

I need some work done on my car. I go down and out of that xxx amount of dollars I pay the mechanic for the work done. (Note: almost everything we now use in this profession is now made in another country.
This is an out flowing of money).

The mechanic decides that he wants a new T. V set. He goes to Sears, pays the cashier for the T. V set and brings it home. (Note: I believe that all TV's are now made out of country. This is an out flowing of money).

This can go on and on. What money is not being sent to other country's is just being shuffled back and fourth for services rendered. And to top it all off, we are taxed on all of this.

So, among ourselves, we have less and less money. Nothing is flowing in, everything is flowing out.

The cure. To give the illusion of wealth.

The Fed prints up more money out of nothing (Money=Debt) and pumps it into the system. This causes inflation (hidden tax), which causes a devaluation of the dollar which means that we pay more for the item.

Prices in 1960.

http://www.1960sflashback.com/1960/Economy.asp

1999 prices.

http://www.1990sflashback.com/1999/Economy.asp

(Note: it is even worse now than it was in 1999)

The foolish say, "But we make much more now than they did in the 1960's"

This is the illusion.

Yes, in dollar amount we do make more. In real value however we make less.

Think about it. In the 1960's a time where it was predominantly still a one person in the "workforce" household, people were able to afford things that in all honesty we can no longer afford even with both members of the household working.

The 1960's was also a time that we still had our manufacturing base.

We can no longer afford it, but we can still get it through credit. (More debt, deeper debt).

In essence, there is no balance. With the loss of our manufacturing base there is a constant outflow of our "wealth", but no inflow. This is unsustainable and we are now beginning to see the real damage of these so called free trade agreements such as NAFTA. Our wealth is gone and we are now in a debt that we have no means to repay.

Through bringing back our manufacturing base, we bring back the backbone needed in order to support this country. Manufacturing is the backbone of the economy because it is the means of creating something of value. The importance of this cannot be stressed enough.

Once again, there is plenty of information out here regarding this.

Only if these three things take place can we begin to build this country again in a way that will be beneficial for all.

Yes we will have to make some sacrifices before this is achieved but there is no way around it.

The alternative however is what we are going to see because these three things will not be implemented.

The alternative a total collapse, a loss of everything we have...or think we have.

THIS IS WHAT THE RULING ELITE DESIRE. THIS IS WHAT IS NEEDED IN ORDER TO FORM THE NEW AMERICAN UNION AND A NEW FORM OF MONEY CALLED THE AMERO.

This is not some fantasy. This is reality.

Once they have everything and the people in this country are living in destitution, they will pawn off the New American Union as the only possible solution to our predicament.

The people will be led to believe this and they will accept this further consolidation of power into the hands of the ruling elite in the hopes that their lives will be better.

This is not about money, not in a sense that many believe it to be at least.

This is about power, and power alone. They already have more money than they could possibly spend in many lifetimes. Hell, they are the very creators of money.

This is all about power and about control. Once the people in this nation are living in squalor and destitution, once all illusionary wealth they hold is taken away, the elite will then hold everything in their grasp, including us.

Do you think you actually own anything? Do you think you own your house, or your car, or anything else? Even if they are paid off, do you really think that you own them?

Think about this. If you actually own something, how is it possible that they can still take it away?

We own nothing. This is an illusion. They own everything is the reality, a reality that they are about to show us.

If you have any debt whatsoever that you can not pay for at a moments notice, then you do not own anything. Everything that you think you own can be taken from you.

I'm done for now.

The real problems of this country are not being addressed and aside from Kucinich and Paul, I see no other politician really standing up and speaking out against these issues.

We are going to lose everything because too many people are blinded to the truth and it is too late for the people to really wake up and prevent what is coming.

Crimson.

You make a lot of sense CE.