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Just yesterday, Henry Paulson’s “bailout” bill, with
only a few anti-Wall Street, pro-Main Street fig
leaves slapped on by Democrats, appeared ready to sail through Congress on a
bi-partisan tide. But something funny happened on the way to the printing press.
It appears as if some conservative House Republicans are reluctant to sell
their souls and ditch any remaining pretense
towards American-style capitalism.
What’s left of the Barry Goldwater wing of the Republican Party, which
maintains its natural tendency to trust the markets and not government, has
dug in its heels. But, Bush, Paulson and the
Democrats have argued that our problems are so dire that free enterprise
principles must go out the window. The struggle is historic, but the
Congressmen are fighting a losing battle. Sadly, Americans now appear willing
to abandon their economic heritage at the first sting of financial pain.
Although passage does seem inevitable, it is nevertheless the wrong thing to
do. Central government planning did not work in the Soviet
Union and it will not work here. Only free market forces are
capable of sorting through the mess. Political meddling will make the
problems worse.
In selling the bill to Americans, many are pointing to the Resolution Trust
Corporation as an example of similar intervention that worked in the past. However,
there is no proof that RTC actually helped as we have no way of knowing what
might have happened had the government stayed out.
Missing in this discussion is that the Savings & Loan crisis of the
1980’s, much like the current crisis, was a byproduct
of government interference in the free market. By insuring bank deposits
through the FDIC, the government created a moral hazard that resulted in
extreme risk taking among member banks, whose depositors sought only high
yields, without any regard for the risks that the banks were incurring. Banks
that refused to take big risks lost deposits to those banks that did. Absent
FDIC insurance, depositors would have considered risks as well as rewards, and
the S & L crisis never would have happened in the first place!
The urgency for passing this bailout bill is based on the claim that the
American economy will collapse if nothing is done. If the government were to
stay out, and allow the market to function, there will certainly be a great
deal of economic pain. Companies will go bankrupt, banks will fail, real
estate and stock prices will keep falling, and many people will lose their
jobs. However, government action will not prevent any of this. At best, it
will merely delay the inevitable, but only at the cost of increasing the
severity of the underlying problems, thus making their ultimate resolution
that much more painful to endure.
The bottom line is that there is no way to resolve our economic problems
without a severe recession, and our politicians need to level with the
public. As a nation, we gambled on the alluring riches of real estate and we
lost. The price must be paid. Contrary to the Bush Administration rhetoric,
the fundamentals of our economy are not sound. If they were, we would not be
in this mess. Recessions are meant to restore balance, purge excess, and
liquidate mal-investments. On that score we have a lot of work to do.
We are being told that this plan will help the economy by keeping the spigots
of consumer credit flowing. However, to really address the fundamental
problems, those spigots must be tightened. Since we have already borrowed and
spent ourselves into bankruptcy, the last thing we need is for consumers to
borrow more.
Our leaders maintain that without this bailout consumers will not be able to
borrow money to buy cars. So what is wrong with that? We already have plenty
of cars, and if we are broke, why do we need to buy more? Instead, we need
drive our old cars longer, pay off our underwater auto loans, and produce
more cars for export. It is also argued that without access to credit parents
will not be able to borrow money to send their kids to school. That’s
fine by me as it will force Universities to reduce tuitions to levels
families can actually afford. They will either have to cut out all of that
bureaucratic fat, or go out of business for lack of customers.
In the end it is impossible for the American economy to be rebuilt on a
sounder foundation of savings and production without a lot of economic pain. Government
efforts to reinforce the shaky foundation of borrowing and consuming will
result in the entire structure falling down around us.
Peter D. Schiff
President/Chief
Global Strategist
Euro Pacific
Capital, Inc.
20271 Acacia Street, #200 Newport
Beach, CA 92660
Toll-free:
888-377-3722 / Direct: 203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
For a
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