Fiery_penguin_of_doom Posts

Ideally, we don't want to bail anyone out. Bank failures aren't commonplace, but they happen, and sans a tough recession, those banks just fail. After all, the feds let IndyMac fail.

The financial sector companies got bailed out because they give out the loans that allow expansion and job creation.

The "Big Three" came very close to not getting bailed out. They weren't as essential, but apparently the government wanted to save the jobs. I personally was a bit torn on that one.

But on a larger scale, the point is that the whole system failed because the incentives were in the wrong places. Go back to what you say about capitalism in general: it works because it takes the natural desire for financial success and places incentives so as to produce a functioning market. Well, the financial system failed in this respect. There were financial incentives for people to do stupid things.

There were the subprime mortgages. Realtors didn't care because they got their commission regardless of whether the mortgage defaulted. Banks and the hedge funds they sold mortgages to didn't care because they could create "holder" companies and put these dangerous looking assets on those companies' balance sheets. Besides, as long as housing prices went up, there was more money to be made, and even when they stopped, it would be gradual, right? Unfortunately, this created a system where, when things started to go even somewhat badly, all of a sudden no one really was sure what their assets were worth, and panic ensued.

Additionally, you have credit-default swaps, which were intended to be like corporate insurance, being used for speculation. So now, things are even more unclear, and some financial entities have a financial incentive to see other entities fail. These contracts are also privately negotiated with no transparency, presenting obvious conflict of interest potential.

The long term point of the bailout is(or hopefully should be) to stabilize the sector somewhat to find time for the market to realistically evaluate itself and at the same time put into place regulations that make financial dealings more forward and transparent. Credit-default swaps need to be transparent. Companies need to accurately represent their assets. People should not be able to fabricate their income on loan applications. What pushed this from "tough recession where some companies fail" to "potential collapse of the financial sector" was that nobody had any idea exactly what was going on because companies were able to engage in risky high profit potential lending and speculating and obscure the records. Reforms need to make it so that if companies wish to engage in potentially reckless lending and speculating in the future, their balance sheets will reflect these assets with transparency so that the market can evaluate them accordingly.

The private sector's inherent system failed. Reforms are needed. The government is the only entity capable of enacting these reforms.



To much growth can actually be bad, which is why the FRB raises interest rates during booms. If the economy is growing incredibly fast it would mean that either an extremely large amount of material wealth is being created(someone invents new technology that drastically changes production, which is what happened during the industrial revolution, this method is not a bad thing) or things that already exist are becoming more valuable very quickly. If it's too much of the latter, then people who already have these things tend to hold on to them, because they are getting more valuable and they want to sell high. People who don't have them want them because the price is going up, and they can sell them later for profit. If this is localized to one thing you have a bubble. If it's widespread you have high inflation. If inflation is affect things like food that people can't not buy, then it hurts the poor and middle class, as their earnings become less valuable. And of course, when this widespread superbubble collapses, it is not a pretty sight. This is why inflation is monitored by the FRB, because it can feed on itself and create a volatile speculative market.

The idea of central banking and even of governments running corporate entities is not something new, nor is it something that goes against the constitution. The Feds run the Post Office, local governments run the Police, and no one complains. This is partly because these services are seen as necessary and no private company wants to run them. This is kind of what happened with the financial sector. It's important, and no one wanted to buy it, so the government stepped in. Honestly, though, they aren't trying to run the companies they invest in, but rather buy up the subprime mortgages right now to stop the uncertainty and chaos, and then sell them later once the market sorts out what the values of things should be. Of the $700 billion the government spent on bailing out the financial sector, they should get at least $500 billion back, and there is an outside chance they could make money.

The government's job is not and has never been to directly run the economy. They generally don't even try to. Their job is to provide a groundwork of rules and regulations that create an environment where incentives are in the right place for companies to act sanely and punishments exist for those who try to cheat via dishonesty.

Social Security needs to be phased out, I agree. Outright killing it would be fine with me, but the people who have already paid in would complain about not getting what is rightfully theirs.