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Thursday, October 30, 2008

The Great Wall Street Bailout - End of Capitalism?

So much for capitalism on Wall Street. Like any other group of businesses, there is strong resistance to any government regulation, but considerably less resistance to a bail out when it's inevitable that the CEOs have blundered and endangered the entire economy.

According to those who amass such statistics, the American public opposed a bail out of Wall Street by 99 to 1. After the president, the Fed. chief and the Secretary of the Treasury explained to the public the severity of the situation, those opposed dropped from 99 to 90. One California congressman said that his e-mails and phone calls were running 300 to 2 in opposition. This is because there is probably no other group in our economy that would be likely to be on the receiving end of such a huge bail out except the financial sector.

Forget the fact that the cause of this problem is attributed to several factors:

A. The lax standards for mortgages – no doc. loans, ARMS with no right of pre- payment, 125% loan to market ratios, etc.
B. Arcane and complicated instruments surrounding these mortgages.
C. Exceptionally low interest rates for a long period of time.
D. The repeal of Glass-Steagall. (The Banking Act of 1933)
E. Mark to market accounting.
F. Exceptional leveraging by many institutions, and more.

The American public knows little about these factors. They do know, however, that this mess was caused primarily by greed and avarice, coupled with a great deal of incompetence on the part of the executives involved. They also know that these executives are not held responsible for their actions, but are, instead, handsomely rewarded by contracts they negotiated with very friendly Boards of Directors.

Carl Icahn (the ultimate raider) likens the bail out to a laboratory run by mad scientists who concoct a batch of chemicals, which when united, blow up the building. After the dust settles and the debris is hauled away, the laboratory is back in business with the same mad scientists in charge.

If one likens it to an addict, there are even those on Wall Street who think that we should keep feeding the addict (Wall Street) more uppers. But, allowing the addicted ones to withdraw with all the necessary pain could be a better course to follow.

The smart people who set our fiscal and monetary policy may be making a huge mistake by not letting the market forces take hold and run their course. There is much debate that the constant tinkering and intervention during the Great Depression, in fact, only served to prolong the Depression making it last for 12 long years (See The Great Depression in the United States from a Neoclassical Perspective - Cole and Ohanian).


  1. While i agree that nature should run its course on these companies and that intervening is only making all of this worse the source of the cause you claim is false. You can ultimately blame the people themselves but that would be stupid because they were all mesmerized by the sweet deals they were getting from this mortgage firms and banks. But now we must blame the banks then right? Wrong. The only reason the banks started doing this was because the government and community organizations like ACORN basically forced the banks to make these bad loans. So the blame comes back to the government and corrupt organizers. Why should we let the government intervene when they made this mess. This is much like the mad scientist thing you said but applying it to the people who were at the source of the cause. Sure the CEO's of these companies had to take the bait but who wouldnt when the government promises you all sorts of bonuses and tax cuts.

  2. First off, great post! And Stephen, that's a significant insight that I've heard before. What I want to know is what kind of weight the bailout leaves on all CEOs from now on. I haven't seen a single article detailing how corporate executives lost so much in the bailout; from now on, it will be every CEO's duty to beg the government for money whenever their company fails.

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Thanks for your comments! Jan and Stu