Saturday, September 27, 2008

Wall Street & Government Intervention

There is a debate currently being fought between those that want government intervention and those that do not. Within these two opposing positions, each has two distinct and opposing views as to why.

For those that think intervention is critical it is for reasons that benefit their pocket book directly (those that took a risk with these “toxic-radioactive” assets) and those that buy into the notion that the economy will suffer greatly (and hence so will their pocketbook) if something is not done soon, the notion of these institutions “are too big to fail.”

On the other side of the fence are those that believe government intervention is the wrong course of action, and here it gets a little bit more crowded as to the reasons why. One set, and here is where I am falling, believes that true capitalism requires reward and punishment for taking risk. Other believe that allowing any government intervention just puts the government closer to calling the shots which stifles creativity and innovation – keep them out at all cost – camel’s nose under the tent sort of thing. The third does not want taxpayer monies being spent to bail out these people who for the past decade have cut themselves nice hefty paychecks while they gambled, or worse yet, looked the other way knowing full well the shoe would drop and here we would be (we will worry about that later - right now the troff is full! - eat piggies eat!.

Not worth mentioning is the third group that is for it because they want to protect Bush and their parties legacy and those that oppose it because they want to see Bush fail regardless of the cost.
So how can government intervene without creating a mess?
As I see it, a bailout, as in let’s give the Fed 750 billion dollars to do what he thinks is needed only rewards the risky behavior that got them into this mess. By using the argument that these institutions are “too big to let fail” you encourage them to get bigger since there will be no consequences should they make poorly thought out – hence risky – investments. Let me be clear that there is a difference between taking a calculated risk and gambling risk. To bail them out means there were no repercussions for this behavior – and since they are in fact the only institutions that power our economy, they can go about business in the future with little lesson learned.

I say either do nothing and let the market sort it out – it will – there are strong players in every downturn that will rise up – or - loan them the money at the type of interest rate our credit card companies charge us when we appear to them to be risky, you know, 29.5%.

1 comment:

Andy said...

I agree that there is no good way to deal with this - and although I agree that you do not want to reward bad decision making, I think proper regulation would keep these companies from becoming even larger and more reckless. It would be funny, were it not so sad - this time, two years ago, a friend told me he would not have been able to buy the house he had just purchased were it not for Reagan.

I have to wonder, now, how many people think the same thing about the current financial crisis