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The Bailout: 4 Reasons Why Congress Should Vote "NO"

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"Helping Main Street by Helping Wall Street" is a false claim for which there is no need or rationale.

Acting hastily and out of fear on a bailout plan of highly uncertain efficacy, of a size that will constrain options for other remedies, is irresponsible. Congress is engaging in the same reckless lack of analysis that brought us a prolonged Iraq War, and in the same financial industry wishful thinking that brought us the mortgage crisis.

 

1. The bailout is irrelevant and unnecessary.

a. U.S. consumers, businesses and governments simply have too much debt. The economy is in the process of reducing leverage through write-downs, bankruptcies, constrained spending and contraction of credit availability. The government is not big enough to stop this inevitable and healthy shift.

b. The private markets are fully capable of recapitalizing deserving institutions. Witness the approximately $30BN raised by JP Morgan, Goldman Sachs and Morgan Stanley in a few recent days. Private capital is perfectly capable of purchasing "toxic" assets by using the same reverse auctions that the Treasury wants to use to deploy public funds.

 

2. The bailout is far too big given the complete lack of evidence for its efficacy.

a. It is highly illogical to commit to a massive plan whose benefit to Main Street is utterly unclear and historically unstudied. The Treasury and the Fed, like everyone else and through no fault of their own, have been thoroughly ineffective at predicting the outcomes of interventions.

b. What assurance do we have that removing toxic assets from bank balance sheets will result in increased lending by our new, highly concentrated, banking sector? The other Federal Reserve action to promote lending, injecting enormous amounts of liquidity into the banking system, hasn't improved Main Street lending conditions. Nebulous claims about "improving confidence" are no justification for risking hundreds of billions of public money.

c. Let's keep the government's financial powder dry for uses where the effect of the spending is more clear and predictable, including directly helping individuals impacted by any economic fallout.

 

3. The bailout is un-American

a. There are numerous healthy, successful banks, many at the local level and some national (e.g. San Francisco's Wells Fargo). If you insist on spending government money, why not invest in these institutions in return for their commitment to increase lending? At least, let's help by rewarding success and prudence, rather than recklessness.

b. Our financial institutions are a product of recent human endeavor. They are replaceable. American entrepreneurship, with its hundreds of years of successful track record, is fully capable of quickly replacing institutions that have shown once-in-a-century incompetence and avarice. Why reward failure when so much entrepreneurial energy and capital is available to sweep these institutions aside?

 

4. The bailout is immoral

a. "We made massive amounts of money making what turned out to be terrible, destabilizing decisions, and now Main Street better save us for its own sake." This is industry's argument for holding up the taxpayers. The only moral path is to show these people the door.

b. Without any direct evidence or certainty of benefit to Main Street, it is immoral and mind-bogglingly circular logic to help the institutions and professionals at fault by taking money from generally faultless taxpayers who are likely soon need help as a result of the perpetrators' actions. In other words, Congress is taking a pot-shot at a plan to help Main Street avoid financial pain in the near future by sticking it with a bigger financial bill today, with the only certainty the benefit to the perpetrators.


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Derin says

I totally agree with this. They are just trying to scare people. It was greed that got us to this point. Maybe we need to be disciplined for a couple years, and tame our appetite for risky behavior. I've been guilty of this, and I'm paying the price. No one is bailing me out. The current administration is doing exactly what they did with Iraq. Scaring us into the unknown. This article is right on point.
Posted at 8:33 pm
Nick says

As someone that is intimately involved in this crisis (part of an small investment bank that helps distressed companies), I'd have to whole-heartedly disagree with many of your points. 1. Private markets are NOT capable of recapitalizing deserving companies. Private markets, as evidenced by the past several days and the deals you mentioned, are interested in providing capital in those situations in which it can gets yields in the high teens to low twenties range, with significant downside protection (warrants, etc). The average middle market company (which makes our country run) does not have access to this type of capital, and if it did, could not afford to pay such prices. Only those companies in the direst of situations would (ie JP Morgan, Goldman, Morgan Stanley etc). 2. The "assurance" that we have that removing toxic assets will lead to increased lending is that this is exactly how banks make money. The entire problem in the economy right now is that the credit markets are frozen, banks (due to regulatory issues and the insane market-to-market rules that they must abide by) do not have adequate balance sheets to make loans right now, and they need not only a healthy balance sheet in order to make loans, but they also need "improved confidence" from Main Street, so that deposits and the bond market is healthy enough to capitalize such banks. 3. While I completely agree that incompetence should not be rewarded, its not rational to believe that there is enough "entrepreneurial energy and capital" to support the entire financial system right now. This is essentially what the US Govt is being asked to do, provide the bridge until such support is available. This isn't a "bailout" in traditional terms, those employees/executives at the large "incompetent" firms have lost their entire life savings and no "bailout" will bring that back. The "bailout", which will be highly profitable for the public as currently structured, simply purchases assets from the banks' balance sheets and does not provide them ridiculous loan terms or any other generousities (for that look at the $25bn recently given the complete group of idiots operating the car companies in Detroit). 4. Again, please actually look at the terms of the proposed legislation before making false claims. As contemplated, the US Govt and the American taxpayer, stands to make tremendous gains on this "bailout". The only person benefiting from not enacting this plan is banks such as Wells Fargo, Bank of America, and JP Morgan. They stand to make a killing off doing exactly what the Govt and the US taxpayers should be benefiting from. Look at the Wachovia deal, which would have been a gigantic windfall for the American public had the bailout been enacted sooner.
Posted at 8:39 pm
Andrew Deal says

Sounds very reasonable. I think it is too late for any outright dismissal to be accepted. My point is to just load the bill with provisions that exhaust every other option and put tighter regulations up front which would dissuade most of the political anxiety being marketed so ravingly.
Posted at 9:22 pm
Matt Fen says

It is maddening to me that Congress would spend my money to save institutions that do not deserve to survive and I agree credit will get tight but so what. The big news is Caterpillar has to pay 1% more to get money. Really? Is this the credit melt down? So people will loose houses they can't afford; so what, it was inevitable. Wall-street has been busy transferring jobs out of the country to make greater profits, because that's how free markets work. Guess what, they killed the goose. There is no way we as Americans should have to spend one dime. It is time to cull the the sick from the heard. It will be bloody for a while, but we are all better off. Let Wall Street BURN. Maybe people with better judgement will rise from the ashes. Democrats and Republicans need to step back and stop this. HAVE COURAGE TO SAY NO and see where the chips fall.
Posted at 9:26 pm
Adil says

It's as if Congress and Wall Street think the only solution is to save the sinking ship. When a ship is broken it will sink. It's not like we can't build NEW ships. That's the whole idea of capitalism. Japan and Germany actually flourished after the War because they built anew, but it took some years of pain and recovery. I'm sorry America, but if you've become accustomed to throwing painkillers at every problem you have, you'll never get to the source of the problem, which will kill you in the end. Tribes people always deliberately burn down their forests every so many years, to make way for new vegetation and life. America can learn from this, MBA not required.
Posted at 9:31 pm
Blaze says

I think Nick's comments sum it up very well. I have never seen this as a "bailout" for Wall Street executives, but more of a lifeboat for those of us who will be effected by their greed and incompetence. Taking the lifeboat analogy a little further, imagine that the loan industry is the Titanic and the government is the nearby ship Carpathia. Do they go to the rescue of the arrogant asses that built the "unsinkable" ship? Are they going to the rescue of the Captain that decided to travel at high speed through an ice field? No, they're going to save the passengers FIRST and worry abou recriminations later. We're the passengers my friends. I hope they put the guys responsible for the worst abuses in jail and cut the pay AND make it impossible for the incompetents to work in the industry again. But right now, it's women and children first.
Posted at 11:46 pm
Bob says

Apparently some of you do not live on Main St. This is yet another mess government has fostered in order to destroy Main St. Let's face it. The dollar is toast. Ladies and Gentlemen, start your wheelbarrows!
Posted at 12:53 am
James M. Taylor says

Excellent article, but unfortunately it won't make any difference since the Politicians and Wall Street are acting on their own behalf. The rules of reasonable and proven economic management started to die during the Carter administration and took a significant greed driven turn in 1999 with the modification of the Glass-Steagall Act. This significant change allowed the the investment banks-commercial banks to cross-over and intermingle. The hybrid they created combined with lack of personal ethics, "get it now while the getting good" plus the Greenspan insistence that there be no bumps, worked in unison to get us where we are. Greed is good;, it is what keeps competition going. However unbridled greed is not good. Regulate to the degree that protects the public interest and also pass laws that make Officers and Board of Directors civilly and criminally liable, IF it can be shown that their acts rewarded "them", at the expense of the outsider stockholders.
Posted at 1:40 am
Sean Goss says

A year ago, I wrote an article for ezinearticles, about the destruction of Free Enterprise, by Corporations, Banks and Governments around the Globe. Whereas small businesses struggle to survive, banks can be bailed out and rewarded if they fail in business. Big Busiiness have insisted for years that Capitalism dictates that they should go about the business without Government Regulation/Intervention. Now that they fail in business they expect government to bail them out? What is this? Corporate Socialism...
Posted at 4:15 am
Grant says

Whether the bailout happens or not we are going to go through a period of severe economic uncertainty. It may very well be that the bailout will be a waste of everyone's time, effort and money. The result will quite likely be the same as our current banking system is completely gutted. Under our capitalist system crashes like this are inevitable, it's just a question of time and severity. I think this time it will be severe even if a bailout is arranged and it may even be that the bailout itself adds to the drag and pulls everything down that much sooner. Damned if you do and damned if you don't.
Posted at 8:11 am
wh says

I am in favor of action but not this. I think the mark-to-market asset eval. should be changed. Next I think the gov. should set up a FDIC-type insurance for these assests paid by premiums from the banking industry. Lastly I think the FBI should be changed with hanlding all the investigations and report out to the people of the US - I don't what Congress investigating this. It's like the fox looking over the hen house.
Posted at 8:46 am
Gary says

It was refreshing to see the House stand up for the voice of the People last week. It was clear that the majority of this country felt that the Bill as presented was reckless and didn’t address this countries current/future financial problem. The fact that the Senate passed the bill and added additional bones to feed the House to sway their vote is simply the same old Government Politics. I’m hoping on Friday the House again stands up for the People and votes it down again unless the Bill can be redrafted for the better of the People. Although we should have never been put into this situation the fact is we are and it needs to be addressed. I would change my mind from no to yes if the Bill was solely for the better of our financial intuitions and with NO add on, NO bailout for those who put us here, NO wages for the CEO’s Etc ( millions to millionaires…go figure ). If this Bill is to be successful we need the strength of all America behind it. As long as backyard agreements, closed door arrangements and so on are happening I just can’t agree with it. Clean it up, protect Main Street, and make it simple and this country will stand behind it.
Posted at 11:07 am
Dan says

"Congress is engaging in the same reckless lack of analysis that brought us a prolonged Iraq War..." As this wholly political aside has absolutely nothing to do with the merits of the legislation or causes of the current financial crisis, strike it. Let me see... Congress legislated jihad? See how that fires you up, you leftwing pansies? Now back to the bailout...
Posted at 1:08 pm
scott says

I completely agree with this article as well, it's all to scare everyone.... Who wants to be accountable?!
Posted at 2:12 pm
Jay says

First of all, buying securites at 4 times the present market value is a gift to rich wall streeters. Second, making billionaires into bigger billionaires does nothing to increase lending or improve the economy. 3rd, it assures it will happen again. The normal way to solve a credit crisis is for the fed to lower interest rates and inject dollars into the economy. The fed has not lowered since April 2008. This lowers the cost of cars, mortgages without spending a dime of taxpayer money. If the economy recovers, the fed can raise rates. 4th, federal borrowing of $700,0000 Million will remove money from the credit markets. We want the federal government to increase money available, not borrow and reduce money to spur on the economy. 5th, 232 american economists say this is a bad bailout plan in a letter to Congress. 6th, lowering interest rates by the fed will help everyone equally and can be done in 1 hour quickly by the fed. 7, you can buy all the bankrupt banks for around $10B rather than $700B. Have the Fed keep the bankrupt banks running so there is no disruption. Sell or IPO the banks with the fed keeping all the profit. 8, Lower taxes for everybody and spur the economy. 9, Fire Paulson and Bernanke asap. 10, Allow anyone to get a mortgage with 40% downpayment direct from federal discount window at fed funds rate. The large down payment prevents the fraud and removes risk of default.
Posted at 8:43 pm
The Author says

Some responses to Nick: 1. Private markets ARE capable of capitalizing deserving companies. You say the private markets will "only" do this when adequate returns exist, but that's the definition of a deserving firm. In addition to the $30BN I mentioned (JPM, Goldman, Morgan), GE raised $15BN, and Wells Fargo expects to raise $20BN for its bid for Wachovia. Consolidation is also healthy in the immediate term in terms of building market confidence: fewer institutions exist but a higher percentage are considered worthy trading partners and market participants. 2. Banks can use bail-out proceeds, just as one non-lending example, to repurchase their own shares to increase Earnings per Share. Also note, all the liquidity the Fed is pumping into the system isn't generating new lending either. 3. The rapid-fire deals and financing show there's plenty of energy to fix things. Letting a few institutions fail is in fact a faster way of releasing that energy as it provides a clear field rather than requiring new-comers to dislocate large (govt-backed) entity. 4. In the case of the auto loans, the government also owns an asset, shaky auto-company backed paper instead of mortgage-backed paper. Anytime private industry asks the government to provide what is typically available from the private sector (loans, acquisition of securities), it's a bailout as by definition the government is being asked to take risks that private sources find good reason not to. We have no idea whether the govt. will make money on the bailout and it's not the point at all. If it where, then every time the stock market declines, you could argue that the government should buy shares, it's not a bailout because it's "getting something" (shares) and claim that because the purchases were at what some people thing is a low-point the govt will make money and so all is good.
Posted at 1:33 pm
Steve says

Agree with the premise of injecting new liquidity into the market, but not the way the bill proposes. Buying "toxic" assets will not induce lenders to open up the spigot, in the opinion of this banker. Just a poor use of taxpayers's funds. If the Feds wanted to improve the lending environment, take the same approach as they did with AIG. Prop up the lenders with capital, whereby they can deal with the problems while advancing the economy. Give the Feds an upside play in going concerns rather than speculating on the spoils. (Also, I find it quite interesting that the FEDS can marshall $700b so quickly for this initiative, but not on things like healthcare, infrastructure and other pressing issues....) Further, I assume all the commentators to this blog HAVE read the bill. It is amazing that less than half of the content is devoted to the bailout. The majority addresses energy policy (legit) but an incredible amount of, as they say, "pork". It amazes me that the congress could vet all the added items ($140b) so quickly. Something is definitely wrong with the system. And lastly, I am so utterly disappointed in who the electorate has chosen for presidential/vice presidential candidates. None of the four have a bloody clue to the economy and, further, its effect on the US global geopolitical standing. With the state of the US, economically and politically, in foreign affairs/policy, etc., this should not be an "election", but rather a "hiring", i.e., bring someone qualified to turn this around. Someone that understands what it takes to sustain oneself financially and compete successfully in a global market... such as a Jack Welch.
Posted at 7:33 pm
Jonathan says

As an economist, it was amazing to see that your 4 reasons are as stupid as something could get. The four are all wrong. Thank Britain for showing the way.
Posted at 4:57 pm
Jenee says

What Happened to Competition? It is totally unfair to the american public to bailout any large corporation, especially if you are not gonna bailout the small businesses. The auto industry have created this oligarchy pushed and lobbied government to protect there interests and get their own way to the detriment of the industry and the public, now its time for them to retire. Their age is done. Detroit knew they were driving down a dead end road, and they had many opportunities to steer towards Green City. Instead they drove past Electric Ave (laughing cause it wasn't as effiecient), past the Natural Gas Blvd (those cars dont make enough of a profit per item) , slowed down and looked at Hybrid lane, but it was a service road too slow for them (especially if they have to retrofit the entire assembly line). They chose to spend thier profits unwisely and irresponsibly. So why should we the tax payers pay for their greed, lack of forethought and hubris. Let them go under! There are enough resources in the market to create hybrid car companies that can be just as competitive as the other companies on the market, and with the big three outta the way their workers would be available for new auto startups. It would take a minute but it would be the infusion of innovation and true competition that the economy really needs. The new companies wont have to pay much for training cause the workers would have prior knowledge. It would even open the industry for shops that specialize in transitioning from gas to hybrid engines jus like we now have shops that specialize in transmissions. The fallout if detroit goes under would be bad but it is still ineveitable all we end up doing bailing them out is paying an extra sum of money (prob in the billions) to postpone the inevitable. They dont change now they will fall and the later it takes them to do it the harder they will fall and everyone knows that the head CEO's will get away ok, while the workers lose everything, (Enron anyone?)
Posted at 1:41 pm

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