Bailouts: The Wrong Way To Correct

In a brief discussion yesterday, we explored the topic that bailouts are simply not the right way to stimulate spending or to relieve the effects of a suffering economy. It reminded me of an article Gary Foreman wrote about "Why Bailouts Are Dangerous.".

Perhaps people have forgotten the basic rule of economy efficiency: No one can be made better off without making someone else worse. Of course, we realize now that economy efficiency is merely a sugar-coated commercialized slogan.

I find myself asking this question over and over again, "Who are these bailouts for?".

By printing more money for bailouts, you are effectively eroding the capital that few healthy companies still have. These are the companies that had done things the right way or at least less wrong. They did not dispense hundreds of millions in executive payroll or bonuses and they certainly did not act irresponsibly for profit. Yet, the bailouts are punishing them.

On the other hand, help is given to failing or failed companies run by incompetence and greed. What really ticks me is that though the companies are suffering, the executives are all full in their pockets. What has happened to basic and business ethics?

I believe banking in US are simply too unregulated with too little bariers to entry. Nationalizing the banks may be their best option for a financial upheaval and reform. In truth, banks are not an easy business with low spread margins for profit. Thus, they are motivated to create many products to sell, up to the point where even they have no idea what they are selling. This is a design for failure.

Contract laws are sacred in a capitalist society but it may be prudent to break existing contracts for the sake of reform. Nationalizing the banks may create chaos in the short term, but in the long run, can turn the momentum on public confidence, revitalize credit lending and spending, and most importantly clean out the poison assets enabling the market to get a fresh start. This is also the only way to make sure that whatever bailout packages given will be completely directed towards US recovery.

Of course, that would mean that we need a responsible government to run the banks.