The Bailout

Is anyone else concerned about the currently proposed bailout? Henry Paulson has proposed a $700 billion bailout of the financial institutions that are having trouble. President Bush, Ben Bernanke(Fed Chairman), Henry Paulson(Secretary of the Treasury) and Christopher Cox (SEC Chairman) are the ones who devised the bailout. As you are probably aware Bernanke has also been providing as much liquidity to the market as he deems reasonable. So we are not only increasing our money supply, we are taking on huge amounts of bad debt. This seems like two undesirable things to do and a really bad idea to be doing at the same time.

The White House released a fact sheet about the actions that are being taken. The fact sheet can be found here: http://www.whitehouse.gov/news/releases/2008/09/20080919-12.html
Here are the bold points from the fact sheet:

1. The Administration will work with Congress to pass legislation approving the Federal government's purchase of difficult–to-sell assets, such as troubled mortgages, from banks and other financial institutions.

2. The Treasury Department is acting to restore confidence in a key element of America's financial system – money market mutual funds.

3. The Federal Reserve is also taking steps to provide additional liquidity to money market mutual funds, which will help ease pressure on our financial markets.

4. The Securities and Exchange Commission has issued new rules temporarily suspending the practice of short selling on the stocks of financial institutions.

5. The Administration looks forward to working with Congress on measures to bring greater long-term transparency and reliability to the financial system.

The first item mentioned is what is currently being discussed as the $700 billion dollar bailout. Item 3 involves Bernanke printing more money from thin air. Item 4 is where Cox gets to be involved and interfere with the market, and stops the short selling on all "financial institutions". I put financial institutions in quotes because it doesn't mean what it use to. The Privacy Act of 1974 has been amended to have a different definition of financial institution. After H.R.2417 was passed the definition of "financial institution" now includes: a pawnbroker, a telegraph company, a business engaged in vehicle sales and also the United States Post Office. Hopefully the definition of "financial institution" will be limited to its normal definition in everyday conversation.

(If anyone is interested in learning more about the decline of our civil liberties and also background on the change of "financial institutions", you can listen to Judge Napolitano here)

Most people in the media are calling for more regulation claiming that this will get at the heart of the problem. Perhaps we should realize that regulation and government interference into the marketplace is the problem. Every time that the Fed pumps money into the market to provide liquidity this is a government interference in the market. Every time the government bailouts huge firms that have made poor decisions, this is government interference in the market. Every time that the SEC stops trading out of fear of what the market might do, this is an interference in the market.


So the progression towards Socialism continues in the United States. Perhaps it is time that we stop thinking of ourselves as a country who uses markets with limited government intervention and start thinking of ourselves as a socialist country that occasionally uses markets.

Todd C.