The Big Bad Bank Bailout

So Congress is working on the big stimulus package, and the administration is preparing to use the second half of the TARP. Meanwhile, the Federal debt is exploding and the economy is collapsing. And I hardly even want to listen to the news because every time I do, I hear the same nonsense.

I have very little sympathy for the bankers and the homeowners who overextended themselves. When houses are priced such that only 10% of the people can afford a median priced home, prices will come down. We have all known that housing would have to come down. Now it has, and that is a good thing. And when most people can again afford housing, that will be a very good thing.

The people who bought in at the top are upside down in their mortgages. Of course, they are. And if they got an adjustable rate loan when interest rates were historically low, they were taking a gamble. Well, they lost. They got to live in a very expensive house for a little while, but they can not afford it any more, so it is time for them to go. Declare bankruptcy, hand the house over to the lien-holders, and find a place to rent. Now, before the situation gets any worse. And for those who can still afford their mortgages, well they still have a place to live, even if it’s not worth what they paid for it.

As far as the banks and the bondholders, well they took some risk too. They assumed that home prices would go up forever, which is just silly. Especially if they looked at the price of housing compared to what people could afford. So, in general these companies should into bankruptcy too. They bet the farm, and now the farm is gone.

But it is not that simple. If Citibank, BofA, or AIG fail, it is a domino effect, and all the other banks go down too. And having all the banks go out of business is not good: we saw that in the ’30s.

But that does not mean that the government should keep them all in business. The people at the bank made bad choices, and bad loans. We should not give tax payer money to banks who made bad loans so they can make more bad loans. Or worse so they can gobble up smaller, healthier banks, so the big bad banks can teach the good little banks big bad ways. No, if we need to give our money to someone, it should be the people who have shown that they do know how to manage it, not the people who have shown that they do not.

We need banks, but we don’t need big banks that make bad decisions. And we have to protect the good little banks from squashed when the big banks fall down. The solution is simple: bankruptcy reform and creditor protection in the form of government insurance.

If congress can re-write the bankruptcy laws so the entire economy does not collapse when Wells Fargo or Citigroup fails, then they don’t need to worry about all the bank’s bad policies. So what that the CEO of Merrill Lynch remodeled his office for a million bucks when he needed to be in a cubicle to save cost. So what that the executive leadership had an offsite at a fancy spa so they could relieve the stress of the bank failure. They will all be on the street soon enough.