Bailing Out America

By Jim Farrish | October 06, 2008 | 9:26 AM | 1 Comment

To borrow a page of doom and gloom from Mr. Pento, the credit crisis the US faces currently, is a result of excess money supply and liquidity in the system. When you have excess money it has to find a home. With the equity markets in disarray from the previous bubble in the dot com debacle of 2000, real estate was a logical choice. Without boring you with the details we know that created the next bubble in housing. The demise of housing has led to the current credit crisis, simply put. The question remains, what will it take to get us out of this situation? The answer isn't quite so simple nor palatable by most in Washington or on Wall Street. I will leave Main Street out of this since the afore mentioned generally do, unless it is a crisis during an election.  

We have to go back to our friend Mr. Greenspan and the policies of what essentially amounts to liquidity bailouts for more than 18 years. We can go back to several liquidity fueled moves in the markets, the most obvious of which was the 1995-2000 move. Through a series of challenges facing the US economy he pumped money into the system to stimulate growth. The challenge with Greenspan was the reticence to take the liquidity back until it the excesses were blatantly obvious. Bernanke has continued to a large degree this standard of dumping liquidity to avert what is a natural course of correction in the US economy. In other words we are trying to stabilize our economy to point of taking out the peaks and valleys. In theory that sounds good, but in reality it creates more potential harm should the strategy fail. Thus, the current credit crisis. The ‘bailout' of each potential hiccup in the economy takes more and more money to resolve without a resulting correction and or recession. Eventually we are going to hit a number that is too big and the result will be, to quote Warren Buffet, "the Pearl Harbor of the financial markets." 

The bailout as many have stated is necessary to stabilize our financial markets. Yes, it is a solution for that objective. It will create liquidity to the system and make worthless assets take on the appearance of value. The question is, at what price. I understand the $700 billion, but there is a bigger price. Government is now more than ever involved in our financial system. Listening to the hearing as Bernanke and Paulson spoke was enough to tell me Congress has no place in directing the financial systems of this country. Government does not, has not, and never will belong in capitalist businesses. Our forefathers understood this when they drafted the Constitution. You can look at other countries and see, this not the way to run a capitalist society. In the end, government intervention, is the destruction of capitalism and the beginning of socialism. The very thing we fought for independence from. 232 years later we are in the midst of being pulled back into that very same government.  

The potential implications of not intervening and letting this take a natural course of correction are not pretty. The potential meltdown is huge. If we don't use a bailout or god forbid, the bailout doesn't work, the Dow potentially falls in the 7000 range. If the economy fails to turn around with a return to growth the number could be near the 4000 mark, which was the level of the Dow in 1994 when Greenspan starting pushing large amounts of liquidity into the system to stimulate the economy and avoid a recession.  

Tax cuts, tax credits and other incentives have worked in the past to stimulate growth. In the process they have increase tax revenue as a result of the growth. The Bush tax cuts worked. They stimulated growth and increased tax receipts. The problem was Congress increased spending more than enough to offset the increase in receivables and created a deficit of $400 billion a year. Is there any wonder they have the lowest approval rating in history along with the President?  

Putting the $700 billion into the hands of businesses and consumer through tax cuts, tax credits and other incentives will do more to fix the economy over the next 3-5 years than the bailout ever will. Yes, there would be a short term price to pay for the sins committed by Wall Street, that is called accepting responsibility. But, adding to the problem with the bailout, Washington isn't going to make it better. As my father always said, two wrongs don't make a right. I hope I am wrong about all of this and the bailout is exactly what we need. But, history has proven the best course of action. And once again we are headed towards fixing a problem with more money to take away the pain of the past liquidity dumps.  

Mr. Obama is right, we need change. Unfortunately, no one is proposing change that will really change anything, but create more of the same. Too much liquidity in the system to cover up what should naturally happen as a result of what happened prior to cause the reaction. I learned is science and physics this is called cause and effect. We will eventually pay the price of this liquidity, the only question is, when?

Jim, Great piece. Here comes Jim, Great piece. Here comes socialism Submitted by Anonymous (not verified) on Mon, 2008/10/06 - 10:39am » reply |