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Making Sense of the Bailout
Published: October 7, 2008 at 7:36 AM
After a 777 point drop in the Dow Jones Industrial Average, businesses, citizens and politicians alike begged the U.S. Congress to pass a $700 billion bailout package bill, late last week. Congress responded by tossing Wall Street the $700 billion life preserver because a lack of liquidity in the credit markets would suffocate consumer and business lending, bringing the economy to a grinding halt.
What does the bailout mean for someone on Main Street? If you as a consumer can't borrow money because the banks have no money to lend, you can't buy the services or products a business has to offer. As a result, businesses can't cover their operating expenses—which include payroll—since there is a lack of commerce (no consumer spending) and no available credit (no bank loans). Businesses are then forced to cut costs, which in many instances result in employee layoffs, and the entire episode comes full circle.
Why are we in this mess? Credit. We as a country have stopped dealing in liquidities (cash) and are subscribed to the I.O.U. honor system we call credit. Statistics show that more Americans are in debt than ever before and it's a direct result of credit. Credit has made it easy for people to live beyond their means and financial institutions are taking advantage of this. By extending credit cards, auto loans and home loans to individuals who wouldn't normally qualify for them, financial institutions are looking to turn a quick profit through enticing introductory rates, no-interest grace periods and other tactics with back-loaded, high-interest. When these high-interest rates eventually set in, like the ARMs (adjustable rate mortgages) in the housing market, people can't afford the payments and the loans go sour.
History has shown that government intervention in financial issues in not the solution in a free market society. Take Franklin Delano Roosevelt's New Deal for example. The New Deal was created to help America get out of the Great Depression and though some credit it with doing so, the truth of the matter is that the industrial revolution spurred by WWII was the true catalyst for the rise from depression. Even those who believe it was solely the New Deal that helped America out of depression can't deny that over 70 years later government still can't get a grip on some of the New Deal's "bailout" programs such as social security and welfare. Government intervention is a temporary solution that has unforeseen repercussions that can last generations as with the New Deal.
So how does giving $700 billion in cash to the financial institutions, who will put the cash right back into the credit system that caused this mess in the first place, solve the financial crisis? It doesn't; it only continues the viscous cycle, which will inevitably require additional bailouts in other sectors of the economy. Congress has set a dangerous precedent in bailing out Wall Street and it's only a matter of time before the government is forced to buy off sour mortgages and other bad debt. The truth of the matter is that American society has been living beyond its means and a correction in the form of a recession, depression, whatever the terminology is inevitable even with a government bailout.