700 Billion dollars is a relatively large sum of money. If you care about what happens to that little bundle of cash, read on! If the economics of our livelihood does not interest you, feel free to stop here.
I am living in Japan right now, doing my best to do what it takes to learn about where I am, still sometimes a fire can burn bright enough to catch my attention from across the pacific. Therefore, in the interest of a diverse reader demographic and my own interests, I have decided to include this post on the current economic crisis in the good ol’ United States.
If you haven’t heard, this is the situation. The last two weeks have seen the government takeover America’s two biggest mortgage companies, Fannie Mae and Freddie Mac, and its biggest insurance company, American International Group Inc. We stood by while the nation’s fourth-largest investment bank, Lehman Brothers, was forced to declare bankruptcy and another investment giant, Merrill Lynch, was forced to sell itself to Bank of America. On Sunday evening Goldman Sachs and Morgan Stanley, the country’s last two major independent investment banks, were allowed by the fed to change their status to bank holding companies, which will allow the two institutions to open commercial banking subsidiaries, greatly bolstering the resources of both companies.
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke said the only way to put a stop to all this ridiculousness is to have congress pass a law giving the Treasury broad powers to buy as much as $700 billion in troubled assets, primarily dealing with mortgage-backed securities that have lost tons of value due mostly to slipping home values.
I’m pretty sure we all want the same thing here: the American economy to be miraculously rescued from it’s bowel loosening financial slump. Speaking of bowel loosening, we can boil this situation down to one big quetion. If the American economy is a giant toilet bowl, how big is the current financial hole? Judging from how fast so much money and house prices are getting flushed these days, it seems pretty large. Paulson and Bernanke are hoping that this $700 billion is going to be a big enough monetary turd to clog that hole, so some of the water can finally spill out of the bowl of rich senior executives and back onto the waiting floor of desperate homeowners. However, according to many congress members, it isn’t just the turd size we have to worry about. It’s also the consistency. The proposal “does not include the necessary safeguards,” said House Speaker Nancy Pelosi, D-Calif. She called for “independent oversight, protections for homeowners and constraints on excessive executive compensation.” Members have also voiced that the plan is to big to happen so fast, it needs more time in order to be put into practice at maximum efficiency. Maybe this political poo is just the right size, but a little too slippery to resist the flushing waters of shaky planning and hasty implementation.
This isn’t the first time the government has taken a metaphorical squat recently either. Sen. Richard Shelby states that failures with Fanny Mae, Freddie Mac, and attempts to save Bear Stearns last spring show the limited effectiveness of such an approach.
It is hard to make an accurate assessment of size and consistency in such a large and complex market, but some senators have other reasons why they disagree with the preposterously large proposition. Said a Senator about the substantial strategy: “why [are we] rushing to bailout companies whose leaders got rich gambling with other people’s money…” (Sen. Sherrod Brown)
Concerning Sherrod Brown’s comment, I may or may not have my disagreements with buying $700 billion dollars of irresponsibly made loans, but I definitely feel like maybe we could have a little bit better argument then that. (Those executives are BAD BAD BOYS!) I could care less about how ‘those guys may have had their hands in the taxpayers cookie jars before so now we should MAKE THEM FEEL THE PAIN!’ I just care about whether when I need to go get my own homeowners loan someday, I won’t be turned out cold from my local bank. Sen. Jim Bunning is a *little* more convincing:
“It will not help struggling homeowners pay their mortgages. It will not bring a halt to the slide in home prices. This massive bailout is not a solution. It’s financial socialism and it’s un-American.”
Perhaps that is something we really need to think about. According to the essential founder of our wondrous free market economy, Adam Smith himself said in his book ‘Wealth of Nations’ that we must create a economy by survival of the fittest rules. The ‘invisible hand’ guides some institutions to failure, others to success, leading to the happiest, healthiest market attainable. Government takeover of private firms (FNMA for instance) and this proposal are definitely not things you are going to see endorsed in that text.
Still, in my own humble opinion, we have to take a consequentialist view on this issue. I think it is pretty evident that the MOUNTAIN of poorly loaned funds resulting the freeze of the credit market are not leading us to the wonderland of a flourishing market. Also, for those of you who wanted to move to Canada during the Fannie Mae and Freddie Mac incident, keep in mind that FNMA was originally chartered and created by the US government… It isn’t exactly foreign territory we are talking about here.
Normally, I would feel like the President (who by the way is a staunch advocate of the bailout) would be in a position to see the biggest portion of the picture, and also the most concerned with making people like me really happy. But these days, last term, right before he is out of that one place for good, I think history has shown that maybe they don’t have to worry so much about making us love them during the last stretch.
And the last, arguably most pressing question: even assuming all this works, what is the government going to use to wipe afterwords???
I know you were all wondering
In case you haven’t figured it out, I am in support of decisive action. I am merely concerned about the nature of that action, because even though things are bad right now, it could easily get a great deal worse when you throw in the monkey wrench of a poorly spent 700 billion dollars. Please, give me some comments to work with here~ what do you think?
.
