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Where Would We Be If Citi, AIG, GM and Others Were Allowed To Fail?

7 August 2009 2 Comments

Our policy makers would tell you that we would be in much worse shape if we let the handful of large institutions fail that were on the brink in 2008.  Citi, Bank of America, General Electric, AIG, General Motors and others were all near the brink of collapse due to massive losses from risky bets mostly tied to real estate.  What’s done is done, but it’s still worth asking: where would we be today if we let these companies fail?

There are three major ramifications of this bailout policy that our country has embraced:

  1. The misallocation of capital
  2. Incentivizing excessive risk
  3. Middle class burden

The Massive Misallocation of Capital

Our country has dumped trillions of dollars into “failed” institutions, bailing them out, keeping their doors open.  The reason?  We were told, the demise of these institutions would be a domino effect killing off the entire global economy.  Do you buy that?

What if those trillions were directed elsewhere?  What if we took just one trillion, and split it into 100 chunks of $10 billion, then we found the 100 most innovative, successful, American companies and gave them this money and asked them to invest in one of the following industries potentially tied to national security: health care and energy, for example.  What if Wal-Mart took it’s low cost approach to health care?  What if Apple entered the energy sector?  Would this increase in investment lead to startling innovation and incredible job growth?  Maybe.

Then, what if a second trillion were distributed to the 100 healthiest banks in a similar way and asked them to grow and expand and fill the void of a now gone Bank of America, Citigroup, Lehman Brothers, GE Capital and more.  These banks would have already demonstrated their ability to grow at a responsible rate rather than taking huge risks for outlandish profits.  The additional funding would allow these banks to purchase assets at distressed prices from the banks going under.  This would improve future growth for these banks and deliver profits for years to come.

Lastly, what if we took a third trillion and used that to incentivize savings at the consumer level.  Rather that incentivizing debt by providing deductions for interest, what if we providing a deduction for money stashed away in savings?  This would significantly bolster future economic growth through capital from American entrepreneurs not from our government.

This plan would have aided the financial system, helped with the unemployment picture by pushing forward with major innovation from those companies who have demonstrated the ability to innovate and would have put in place the foundation for future economic growth through incentivized savings.  Now that is what I call a better allocation of capital, if we’re determined to spend it, of course.

Instead, we’ve put trillions into institutions that should still be operating.  Do we want healthy companies or do we want the same companies?  We haven’t become more productive and we haven’t become more innovative as a result of this huge allocation of precious capital.  Instead, we’ve merely communicated the message that if you take huge risks and fail, we’ll be here to help… which brings me to my next point.

Incentivizing Excessive Risk

Banks such as Goldman Sachs have already posted huge profits this summer after taking government money.  Like clockwork, the next news cycle brought news that record bonuses would be paid out to their executives.  Of course, the American public gets pissed off at this.  Well, get this America, if you didn’t bail them out, you could actually stop caring about excessive pay.

Instead, we bail them out, and they use this money to take huge risks and potentially make huge profits and then pay huge bonuses.  If a company funded by entrepreneur and venture capital takes huge risks and makes huge profits, so be it.  I wouldn’t care if the executives were making hundreds of billions each, but when its Federally funded with our tax dollars, now I have a problem.

It’s likely that Wall St. will take even larger risks in the near and far future because they have learned a valuable lesson: as long as they are considered important to the national economy, the government will bail them out.  As such, their objective is to stay in the “too big to fail” category because as long as they stay in that category, there is only one potential loser: the tax payer.

The Middle Class Burden

Unfortunately, most members of the middle class aren’t smart enough to see through the political rhetoric being communicated from D.C.  They don’t realize that the are the ones who will be burdened the most even despite the anti-rich rhetoric from the left.  Even if taxes are raised on the rich, the middle class will still bear a huge burden for our insane spending habits.

It’s already becoming more apparent that D.C. needs additional funding (see article on lower tax revenues).  Similarly, the Obama administration is already back pedaling on their 2008 campaign promise to not raise taxes a single cent on the bottom 95% of Americans.  While already broken if you consider Cap & Trade’s costs to Americans in the form of higher energy costs, a more traditional tax hike for middle class folks might actually be in the cards very soon.

Look, whether you’re for Obama’s policies or not, they have to be funded and it’s very unlikely that they can be sufficiently funded without raising taxes on the middle class.  I’m in the middle class and just about all of my readers are as well.  Can you afford additional taxes right now?  How about higher prices to power your house?  If you’re like me and most Americans, money is very tight right now.

Most do not realize, but these policies from our government which have support on both sides of the aisle always benefit the poor and the uber-rich. The middle class will drive this economy and it will drive the funding of the government.  The politicians will exploit that by giving to the rich through bailouts of AIG and Goldman Sachs while offering more government assistance to the poor.  This ensures both critical campaign contributions from one side and the vote of the “regular American” on the other.  Sadly, most regular Americans do not benefit because they are in the middle class.  Attention middle class: even if Obama and others say they are working for you, their actions say different, and no matter how eloquent their words are, their actions are what will impact your pocket book.