Tuesday, September 30, 2008

Economic stress

If the economic crisis on Wall Street is due to a lack of liquidity in the money markets and a tightening of credit, then there is no need for a massive bailout. The federal government, through the Federal Reserve, already has the means to increase liquidity and ease credit.

The appropriate mechanism for dealing with large failures is to allow them to work out through the bankruptcy system. That is what any of us who default, or who are in danger of default, would do. Why we have investment bankers and insurance companies running to Congress rather than the nearest bankruptcy court is not clear.

A large part of the blame must fall on governmental mandates to make loans to those who cannot repay the loans. This is what a sub-prime loan really is, and they are strongly encouraged by federal oversight.

It still seems outrageous for any of us who did not choose to participate in high risk activities to have to pay the bills for those who did. There is high reward for risk, but the alternative is the loss of investment. But I don't believe nationalizing the equity markets would be wise. Politicians would just load up even more stupidity like making loan policies based on political ends rather than credit worthiness.


Cousin Mark said...

So are you withdrawing your support from McCain and planning to obstain or vote for Bob Barr (not sure if he is on the ballot in Texas), since McCain supports the bailout? Anyway, please think about it.

Are you sure the Federal Reserve can stem this crisis by themselves? Why was Bernanke begging the Congress to pass the legislation? Has the Federal Reserve run out of levers to push?

J.R. said...

Just tossing up my thoughts. I don't really understand all of the moving parts of this deal. If what is proposed is merely an infusion of cash for liquidity, the bailout may be the answer.