My current article at NetRight Nation:
On Monday, the Treasury has decided that it is going to buy stocks in all the major banks to help them. This of course is not unlike what they did for Fannie Mae and Freddie Mac. We know how that ended, which was in a complete takeover. They are using $250 billion of the $750 billion to do this.
The FDIC has also came out and said they were going to insure all of the bank deposits that do not hold interest, up to an unlimited amount. This of course plays into the same old plan of let’s give the banks money to loan out that the taxpayers will be liable for. This is like a parent giving a teenager a blank check and expecting him/her to spend it wisely. It will more than likely be spend on movies, cigarettes, or alcohol. The banks of course will just loan the money out to anyone.
All of this is argued to keep banks from failing while they inject cash into the economy. They hope this will then allow the banks to buy all of the failing assets. When the money supply goes up the interest rate goes down. This seems obvious to any Economist of non-Economist. What isn’t clear is that most people believe it was the lower than natural interest rate that caused this problem in the first place and this does nothing but encourage the same types of lending.
This then gets into the market failure argument. Since the market “failed” us at being efficient in banking then the government must step in. I would argue, like many Public Choice Economists, that it was actually the government failure that caused this. Now if you still believe the market is what failed us, it is still not clear that the government would be the most efficient solution.
Instead of allowing the the Fed to continue to print money and give it to these banks, we need to encourage savings. If we encourage savings then we allow the banks to have more liquid and allow them to buy the damaged or failing assets. Some would argue that the FDIC insurance, I mentioned before, would do this. I believe that this is unchecked money and will not encourage the banks to make the best investment. What we need is a type of liquidity that investors would keep there eyes on. If everyone’s money was not insured by the FDIC then people would invest there money in multiple banks and expect to see paperwork on the banks investments. Not to mention, we have banned banks from investing in stocks and so on because we think they are too risky. The more narrower we make the scope of lending money from banks, the more they are going to be susceptible to failure when a bubble pops.
The last problem with this creation of new cash, assuming they are scared to lend money out due to the crisis, is that they will only lend it to those people who have great or better credit. These people are not the mom and pop start up business. These are the Donald Trump’s and massive corporations that will receive large sums of this money. This bailout is in fact a transfer of wealth from the poor to the rich.
What is truly sad is to see both candidates support this and especially when one (Obama) is asking for a tax to shift to transfer wealth the other way. We print money for the rich and when the rich make that into more money we take it and give to the poor. Welcome to Socialism.