03.31.2010 0

Bailouts for Dummies

  • On: 04/30/2010 08:52:47
  • In: Economy
  • By Rick Manning

    The Dodd – Goldman Sachs financial services takeover bill can be intimidating to understand for many people, including myself. However, when all the smoke clears it really comes down to four basic points:

    1. Congress would set up a permanent bailout fund that is financed through increased charges to banks, which will be paid for by financial institution customers and savers. This permanent bailout fund would allow Congressmen and Senators to avoid voting on whether to bailout a specific company like Chrysler, GM, Citigroup or Goldman Sachs, instead shuffling the decision off to unelected political appointees.

    Not surprisingly, Goldman Sachs and Citigroup have both announced that they support the Dodd financial takeover bill since it institutionalizes the very too big to fail philosophy that led to the TARP bailouts in the first place.

    2. Political appointees and unelected bureaucrats can also declare any company to be a financial institution. This means these political bureaucrats can decide that any company needs to be taken over by the government using the bailout fund. This extreme power gives these unelected authorities the ultimate coercive power over business and America’s economy.

    The government takeovers of GM and Chrysler under TARP are a good example of the Obama Administration’s trial run for this power.

    You might remember that Obama took care of his labor cronies through a political deal that benefitted the United Auto Workers union at the expense of those private individuals and banks who lent GM and Chrysler money through loans and bonds purchased. Ownership of both auto companies was redistributed to the politically powerful union leaving no doubt about how the bailout-takeover authority will be yielded.

    3. When the government decides to take over a company, that company is not allowed to fight it in court. So, if you own shares of a company, and the government takes control of that company, you as an owner of the company cannot challenge the decision to take your property in a court of law. Sounds more like a third world dictatorship than America – doesn’t it?

    4. Finally, the Dodd-Goldman Sachs bill doesn’t actually deal with any of the root causes of the collapse of the home mortgage market. For example, government policies forced government sponsored mortgage giants Fannie Mae and Freddie Mac to underwrite mortgages to people who were less likely to pay them back. Congress then built the house of cards even higher by ordering private banks to make similar if not even more risky loans if they wanted to expand across state lines, or merge with other banks to stay competitive.

    Not surprising to anyone even remotely paying attention, many of the people who didn’t actually qualify for loans, eventually couldn’t repay them, and the house of cards which made up the entire home mortgage industry collapsed.

    Now, the same Congressional scoundrels largely responsible for forcing the financial services industry into accepting the idiotic idea that if you lend a crack dealer $300k for a home mortgage that you will get paid back, are ‘fixing the problem’. Feel better yet?

    In sum, the Dodd-Goldman Sachs bill doesn’t fix anything. Instead, it perpetuates the very problem it claims to want to solve — leaving the very root causes in place while insulating the politicians responsible for building the house of cards from the consequences of their political rather than market based decisions. Crazy, isn’t it?

    Rick Manning is the Director of Communications for Americans for Limited Government, and the former Public Affairs Chief of Staff for the U.S. Department of Labor.


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