Wednesday, September 24, 2008

Why should taxpayers shoulder the burdens of a $700 billion bailout?


in·vest·ment /ɪnˈvɛstmənt/
  1. the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.

  2. a particular instance or mode of investing.

  3. a thing invested in, as a business, a quantity of shares of stock, etc.


Investment Bank: A financial firm that underwrites, or arranges the sale, of stock and bonds for companies. Investment banks also implement a variety of corporate restructuring activities such as mergers and acquisitions. Investment banks do not accept deposits from the general public; traditionally, they have not made the same kind of loans that commercial banks do.

Within both of these definitions is an inherent implied risk. More on investment risks can be found here

With basic definition out of the way, I am under the impression that all of these investment companies (and AIG is an investment company - they invest in property value versus likelihood of property loss) were (or should have been) well aware of the potential risk of their business. After all, with investments, risk is the name of the game. That's the reason the investment industry is so lucrative - risk of loss, and minimizing that risk, can beget great profits.

I am not a financial expert, but I understand the basics behind investment and the inherent risks.

Let's put this whole issue into the perspective of an investment that is part of the American dream (and also a large part of the reason for this bailout): home ownership.

Buying a house is an investment, plain and simple. Most homeowners bought their homes in hopes that they could one day sell it at a profit, and increase the size of the home they live in. There is an inherent risk in this, financial institutions aside.

Houses typically do increase in value over time, given demand for housing in an area, the economy, the local schools, the local crime rate, improvements made to the house, etc. All of these factors for increase in the house value are also potential risk factors.

Suppose the major employer in an area shuts down, eliminating thousands of jobs in an area. The value of houses in that area could plummet, virtually overnight. This has been the effect, most recently, in areas where the US Military has shut down bases in given areas, thus eliminating the need for all the housing for military personnel and supporting contractors.

Suppose a bad element moves into the local area, and over time, the bad element expands, putting the crime rate through the roof. The values of houses in that area decline quickly, as nobody, save parts of the bad element, want to buy a house in that area.

Suppose the local school system falters for whatever reason, and performs less than adequately. Families are not going to want to buy homes in that school district, due to not being able to ensure adequate education for their children.

If the general economy tanks (as is happening nationwide at the moment), people are going to be less inclined to want to buy houses, preferring to either rent or stay where they are until money is less tight.

Home improvements are a sub-investment unto themselves - suppose the improvement made is suddenly undesirable at the time of sale? Yup, you guessed it - decreased sale value.

While the above is far from a complete list of reasons a house's value could plummet, it's at least a good example of the risk involved in investment.

When the house becomes millions of houses, and also suddenly includes investments on all sorts of other items such as cars, boats, electronics, businesses, and such, and the economy is faltering due to financial crisis in other sectors, the ones that lose big are the financial institutions funding all of this. It's still nothing more than the inherent risk in doing business. Mom's Craft Shop will go out of business when people can't afford to buy her goods. Lehman Brothers will get liquidated when people can no longer afford to pay their loans. Same thing, different scale.

Now, the Federal Government has proposed a $700 billion fund to bail out the remainder of financial institutions in the US in an attempt to prevent a total economic collapse.

First question: Where is this money coming from? It certainly can't be from the US Economy. Hell, when Bush offered his Economic Stimulus Package earlier this year (total cost: about $156 billion), we had to get a loan from China. That was only 22% of the cost of the proposed bailout. To take it a step further, the named figure of $700 billion isn't a cap - it's the limit to what can be loaned out at any one time. That means that if someone was to pay back $100 billion of this, that same $100 billion could be loaned out again. This thing has no cap. The real kicker is that the Secretary of the Treasury, who would be in charge of sending the bailout funds to their recipients, would be protected under this little tidbit from Section 8 of the act: Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Wait a second, the Secretary of the Treasury, who only holds his job until January 20, when the new president is sworn in, suddenly becomes above the law in his management of $700 billion? You mean he could hand this money to Al Qaida, stating that they held the key to financial stability, and not be held accountable?

Oh HELL no!

Additionally, what does this massive amount of money translate out in cost to each American taxpayer? Roughly $2500 each, assuming an equal share for most. I don't know about the rest of you, but $2500 would put a hell of a dent in my car payment (as an American taxpayer with less than perfect credit, that loan, even without a single late payment, would qualify as part of the worthless credit we're bailing out), and allow me to pay it off in three years instead of six. If the Feds are going to railroad this through, I say we give the money to taxpayers rather than the banks. If this money is going to materialize out of nowhere, us individuals might as well help pay our loans, and make that "worthless credit" into "paid credit" with these mythical dollars.

I'd far rather see this bailout help Americans keep their homes than I would want to see it go to fat-cat bankers, who even while holding all of this bad debt, still make enough to enjoy their cruises around the world and cash to take a vacation to Dubai and stay in the penthouse suite of the world's only seven star hotel.

Ultimately, I'm against spending this money altogether. It will, in the long run, only serve to prolong the inevitable crash of Wall Street, while helping to put the American economy into even deeper trouble. I say let the risk-takers eat the risk. Only then will the economy find equilibrium.

Far too long have we been bailing out corporate financial woes. Let's let the fat-cats see what the average person has to go through.

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