Public opinion polling has revealed that the American public is split on the issue of whether or not the federal government should bail ailing financial companies out of the mess they helped to engineer. I am of the portion of America which believes that bailing out financial companies is a bad idea of the first order.
Why oppose federal bailouts of companies?
In bailing out companies who have engaged in business and accounting practices that were confusing at best and spurious and mendacious at worst, the government is giving tacit approval to allowing either ill-conceived (at best) and corrupt (at worst) business practices to continue. While I do not believe that the government should sit on the sidelines and allow the “natural” course of economics to take its course, I do think that bailing out the companies responsible for getting us into this position, causing us to even be having these discussions, is foolish policy and enables criminals to continue swindling the public. Around a decade ago, the Republican-led Congress, with the approval of the Democratic President Bill Clinton, passed the Gramm-Leach-Bliley Act, which repealed key provisions of the 1933 Glass-Steagall Act. The Glass-Steagall Act did many things, perhaps most importantly establishing the FDIC, but it also set barriers between commercial banks, investment banks, and insurance companies. These barriers helped to prevent the vast amounts of collusion that have hence occurred.
Firstly: What I then propose is a return to a regulated system of banking, one in which roles are defined for banks and they may not collude with other types of financial institutions (including other types of banks).
Another cause of the current economic situation was the development of complex financial instruments that passed the burden of debt was person to person, without diffusing the risk in assuming the debt. Once these debts started to go bad, ie groups of high-risk mortgages going unpaid, financial institutions were left holding the bag of bad debt they knowingly purchased. One can argue the cause of bad debts, from predatory lending to borrowers knowingly providing lenders with fraudulent information. However, the end result is the same.
Secondly: Additionally, I propose that the federal government introduce guidelines to lending and prohibit payday lending at usurious rates (and I will define that as any interest rate on money above 39.99% APR). Borrowers who knowingly provide fraudulent information in order to obtain credit must be punished in criminal or civil proceedings. Also, the complex financial instruments that developed in this period, collateralized debt obligations and credit default swaps, need to fall under regulatory watch so that an explosive period of growth in the future doesn’t precede a collosal collapse like the continued collapse of the last year. The government needs to evolve and be able to meet the challenges posed by evolving markets.
Thirdly, from that last point: the government and its regulatory agencies need to be able to know what they’re dealing with and have the capacities to keep up with an ever-evolving financial system. That government doesn’t need to own companies like AIG, that should only be an action of last resort when a company is on the verge of collapse and that collapse threatens to take down the rest of the economy; rather there must be oversight by parties independent of the organizations being watched over. That’s right: you can’t have the former head of Alcoa try to regulate Alcoa in an unbiased manner. The last eight years have shown us the results of government and corporate collusion; we have a war in Iraq and this mess to prove it.
So, for better or worse, here is where we are. The President and his cronies (Paulson et al) are trying to foist a $700 billion bill on us, the tax payers, while letting the CEOs and other individuals responsible for creating this catastrophic mess off of the proverbial hook. It’s not fair to us, the taxpayer, or to us, the consumer, to let this happen.