Thursday, September 25, 2008


When everyone calls an economic situation a crisis, then there may actually be a crisis. The proposed bailout, which congressional leaders have just agreed upon, is really a momentous piece of legislation. As you know, they want the U.S. government to spend $700 billion to buy up bundles of questionable mortgage loans. The face value of the loans is actually much more than $700 billion, but those holding the loans can’t find anyone to buy the loans at anything near face value.

Theoretically, the government could MAKE money after a few months when they sell these loans again in the open market. I’m not holding my breath. Even if the government did make money, it would be used for more spending, not for paying debt or tax rebates.

But even if the government could make money with this deal, I don’t believe it is the right thing to do. The government does not need to interfere in the free market. The market naturally has ways to correct itself. But in this case, the government wants to step in, ostensibly, to protect us from the fallout of the bad business practices which led to the problem.

Whenever there is government intrusion, there will be government regulation. Government regulation always has unintended consequences. In fact, government regulations, put in place after the Enron collapse several years ago, are partly to blame for today’s situation. Accounting practices which are now required have made financial statements look bad for firms holding the bundles of sub-prime loans. This has sent them into panic, as they try to sell the loans – to improve their balance sheets – in a market where no one will buy them.

With the current proposal, there will certainly be more regulations and more unintended consequences. The government will be in the business of selling off sub-prime loans. And we will have to print billions of new dollars to pay for the party.

Talk about inflation.