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Bailing Out Failed Ideas

Bailing Out Failed Ideas
http://davidkretzmann.com/blog/?p=142

The recent AIG bonus debacle has angered many people, but usually for the wrong reasons. While the $165 million in bonuses handed out to its high level employees is nothing to support or be proud of, it is disheartening when Congress and President Obama spend this much time going after $165 million and discussing nothing of the $170 billion+ they’ve already specially loaned to AIG. Now, a special 90% tax has been passed to recall the bonuses which, if signed into law, marks a huge expansion of the federal government’s power to intervene.

Bonuses are an easy item to attack and gain “extra credit” for, but I’d like to think that people could read through the lines a little bit more than this. If the federal government can just tax a company’s bonus payments (after giving them billions of dollars in bailout money), where does it go from there? Can the federal government just waltz in and pass special taxing legislation when a company does something it doesn’t like?

There are quite a few people who tell us that Washington D.C. is “broken”. I don’t necessarily disagree with this, although I’m sure I have different complaints than they do about government. But these same people want the “broken” system to legislate, mandate, and regulate “moral and ethical decisions.” So the bureaucrat in D.C. knows more about the right morals and ethics of business than the people who actually put their time and money into a business? Washington should not be thrown onto a pedestal to regulate ethics when it itself is wreaking of foul and corrupt play.

The reasoning behind intervening in AIG in the first place, with the bailouts, is shaky at best. Obama recently said on this topic:

"So the problem with AIG was that it owed so much and was tangled up with so many banks and institutions that if you had allowed it to just liquidate, to go into bankruptcy, it could have brought the whole financial system down. So it was the right thing to do to intervene in AIG."

If they got so tangled up with debt exposed to many industries, why in the world do they need a bailout? Why can’t they learn their lesson? Using the “too big to fail” argument, we are told that AIG can’t fail because it would be too painful for the overall economy.

I’m confused.

Obama has said countless times that he wants to change the way Wall Street works. If this is the case, why is he jumping to the plate to continue bailouts, preventing the marketplace from making this very change on its own?

If AIG’s practices got it too interconnected within the financial system, clearly something needed to change with its business. Our financial system is not built on a very stable foundation to begin with, and the market was sending strong signals that things needed to change.

But the Washington bureaucrats just couldn’t dare let this atrocity happen. This way the whole country pays to bailout failed business practices, a failed financial system, and a few irrational individuals who started the madness. Rather than let the people who created the mess fail, go bankrupt, and allow a better operation to come of it, politicians made the decision to keep Wall Street the way it is. Instead, new regulations are proposed to be thrown on Americans nationwide to regulate “ethics and morals” and lord knows what else.

What the government has done throughout the past year especially is try to discourage regulation from the market. Rather than take the signs that the financial system, despite massive central intervention over the past century, is not working, that government sponsored enterprises Fannie Mae and Freddie Mac are not sustainable, and that subprime mortgages obviously aren’t a smart plan for the bank or client, the government actually prevented the short-term failure of all these things. Ignoring the free market’s regulatory power for expanded government regulation will turn out to be the most deadly mistake we take from these rough times.

Those who preach that we need more government intervention do not understand the regulatory powers of the free market. They say that the whole financial system would collapse if the government did not intervene, but do they ever think that we might need to do things in a new and better way? A financial system built on a stable foundation won’t just “collapse”, but an inflationary system manipulated by central powers and government planners will.

The problem with government intervention and socialism is the assumption that government knows the best solution for each and every person, problem, and industry. Through the depths of history no socialist has dared believe that people could enact reasonable solutions through their own errors, trials, and hard work. A government-managed system assumes there is no better way to run an operation, which leads to inefficiency and mismanagement of capital that it didn’t earn in the first place (tax dollars).

Do not believe for a second that one more government regulation or intervention will get us out of this mess or prevent the next one that is sure to come. The market has tried to show us that the way things have been done can’t last, but the government attempts to overrule the power of the invisible hand with bailouts, forceful regulation, and varying treatment to different industries. It isn’t difficult to see that the market is yearning for a new system, but the majority of our politicians would rather take things into their own hands and stick some paint on a building scheduled for demolition.

In a free market it is the consumer and individual who makes the regulations. The government is constantly working to take away that regulatory power and instead place it the hands of a few bureaucrats who promise to protect us from ourselves.

Don't forget that the market was well on its way to punishing the irresponsible business practices; it was not the government regulatory agencies who made the first move. By simply allowing the market to regulate itself, we would be well on our way to deflating the bubbles, weeding out (not bailing out) failed ideas, and by learning from our mistakes we could once again be on the path toward sound economics, sustainable decisions, and unleashing the unyielding power of regulation of the individual.

http://davidkretzmann.com/blog/?p=142