Bailouts, Bernanke and Bankers. (Oh, my!)

Until last Friday, I was confident. Confident that, while the economy was going to be dismal, I knew how to protect myself and my clients from the economic turmoil.

As of Friday, all bets are off. That's not saying that I'm confused or uncertain, but that on Friday, the government, under the watch of the president who will be remembered in history books, George W. Bush, decided to cancel free markets and move on to an amended form of socialism.

Not REAL socialism, mind you. At this stage, socialism looks relatively good. No, the Bush-leaguers are offering a form of socialism where big businesses still get to the profits, but the losses are socialized. Lest anyone wonder, this is SO much worse than socialism that I don't even question people who want to move to Cuba and serve under Castro anymore. I find my Marxist friends more reasonable than those who still defend the Bush-league idiocy. And, remember, my leanings are strongly free-market. But this administration has now gone SO FAR from free markets that they make anything look good in comparison.

To put meat into this argument, let's evaluate the most recent bailout plan. I emphasize "most recent" because after the last few weeks, it is not enough to talk about a bailout plan, because we've done so much in the last few weeks, and talked about so many variations of the same seven plans, that it becomes difficult to keep up. And just for perspective, we should recognize that more intervention in the economy took place in the last three weeks than took place during the entire balance of my lifetime. Given another three weeks, I expect these "big business-socialists" to exceed the entire 20th century in interventionism.

To add more perspective, consider Thomas Sowell's insights on the size of the proposed trillion dollar bailout:

"A trillion seconds ago, no one on this planet could read and write. Neither the Roman Empire nor the ancient Chinese dynasties had yet come into existence. None of the founders of the world's great religions today had yet been born. That's what a trillion means. Put a dollar sign in front of it and that's what the current bailout may cost."

So, that's the SIZE of the bailout. But, even if we get past that, the STRUCTURE of the proposed bailout is every bit as bad, if not worse.

The bailout is designed to have the government BUY all the bad, non-performing assets from the bad banks (and the good banks, and virtually anybody else). They will leave the institutions afloat, and take all the mistakes away. They will essentially get to start with a clean slate. While this may sound good to the untrained ear, it is essentially the worst of both worlds. Not only do we end up rewarding those who made bad decisions (at the expense of those who made good ones), but we do so at great cost.

This is precisely where the free market is supposed to improve on socialism. In fact, it is the failure of bankrupt companies that has allowed the U.S. to thrive over time. The "creative destruction" described by Schumpeter is key to growth. If we try to prop up these failed companies, we are not only expending enormous sums in doing so, but encouraging more bad decisions. Moreover, we are diverting money away from good decisions and successful companies. Money is not unlimited, and what is invested into poorly managed firms takes away from well-managed ones. The benefit of truly free markets is that poorly managed firms will eventually fail. It is this process that ensures that more money is invested into productive ventures than would be in a centralized economy, and it is this investment that does so much to grow a nation's economy.

Under the proposed program, we get the worst of both worlds. We get the messy business environment that is endemic in any free market, but we are "protected" from the consequences of free markets. We are "protected" from the failure of failed institutions. Instead, we are allowed to go the next ten to twenty years watching the zombie-like AIG, Fannie Mae, and countless other financial firms walk among the living, even though they are essentially failed businesses. We get to watch these government-subsidized institutions compete unfairly with other free-market institutions, until they too are forced to either accept government bailouts, or simply fail and drift away into history.

While I understand that it is not politically expedient to say no to this bailout, it is imperative that our congressmen do so. Without the bailout, it is very likely that our markets will crash, financial firms will fail, and people will be left poorer. But at least this devastating time will be short-lived. WITH the bailouts, not only am I certain we will still see market crashes, business failures and an increase in poverty, but the bailout will extend the period of the downturn for many, many years. I strongly prefer a 3-year recession to a 20-year depression. Anyone with me on that?