Sunday, March 23, 2008

Getting High on Government Bailouts - An Addiction

Alex Epstein, an analyst at the Ayn Rand Institute has a clear, tough hitting article on the WHY of what is happening today to our financial institutions. The question I want an answer to is why our government has not learned it's lesson regarding meddling in the market place?

The main idea? Government meddling in our markets is always bad .

The diseases? 1. An addiction-to taxpayer money worse than crack cocaine
2. government manipulation of interest rates and money supply

The result? Inflation-the devourer of wealth.

Lesson? "Taxpayer bailouts breed market disasters".

Cure? Allow the market the freedom to correct itself by learning the hard lessons of bad decisions - in this case low interest loans to bad-credit borrowers.

"For decades our government has had a semi-official policy that large financial institutions are too big to fail — and therefore must be bailed out when they risk insolvency — a policy that creates perverse incentives for them to take on far more risk than they otherwise would. “Too big to fail” is implemented through a network of government bodies that protect financial institutions from the long-term consequences of their decisions at taxpayer expense — a phenomenon we can observe right now. Consider Bear Stearns! ...

"Consider Countrywide, a major subprime money loser just acquired by Bank of America. Private lenders have not been willing to grant Countrywide the tens of billions of dollars it sought to keep afloat, given the company’s huge and difficult-to-measure subprime exposure. In a free market, bankruptcy would loom — but in our system, Countrywide and others can turn to the government-backed Federal Home Loan Banks for cash; these banks have lent Countrywide over $70 billion so far. According to The Wall Street Journal, these banks specialize in “providing funding where other creditors won’t go” — which they can do because of “a widespread belief the government would bail them out [with taxpayer money] in a crisis.” ...

"Still another item on the bailout menu is provided by the Federal Reserve. Today and throughout history, when major financial institutions are losing money, the Fed uses its power to manipulate interest rates and the money supply so that banks can borrow cheaply — giving them easy money with which to paper over their old mistakes. Again, it is other taxpayers who pay — in this case, through inflation. Inflation depletes Americans’ hard-earned savings; the trend of skyrocketing housing and commodity prices we have witnessed during the last five years is just the latest and most obvious harm done by our government’s inflationary actions. ...

"The combined effect of these and other bailout policies is to make risk-taking less risky for large financial institutions — because true failure is not an option. ... (Read)

Alex Epstein is an analyst at the Ayn Rand Institute, focusing on business issues.

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