Disclaimer - I've tried to keep this blog focused on my book and topics related to it, but I've been noodling on this for a while and I just needed a place to get it all down. And I'm not an economist or financial professional, so my analysis is a best effort with limited knowledge. As always - I am oversimplifying to try to understand. Maybe it'll help others to do the same.

Now - to the bailout - if you can believe the polls, most folks are against it. It just seems wrong to take an almost inconceivable amount of money (from taxpayers) and hand it over to fat cats on Wall Street who've been playing fast and loose with our country's financial future - all just to keep them from suffering the consequences of their misguided actions. Opponents say it's a massive step away from free markets and toward the kind of socialism our country has waged many a military campaign to stamp out.

In principle, it's hard to argue with that, especially if you're libertarian-minded, as I am. However, there's a practical side to this that I think is more than just "sky is falling" scare-logic. The headline is this: if these institutions are allowed to fail, our economy is very likely to completely collapse - as in, we all lose our jobs and chaos ensues...for a while.

I know it sounds crazy, so let me throw out a few things that lead me to this conclusion...

1. Our economy is built on money that largely does not exist - funny money, if you will - which means consumer confidence in banks means everything. (You can thank the Fractional Reserve System for that.) I think we all know that for every $1 of actual cash that is deposited in a bank, several dollars are loaned out. This, in my view, is the heart of our problem, and it has gone beyond what the existing safeguards (read FDIC) are capable of dealing with. As the wikipedia article says,

"...if creditors (note holders of gold originally deposited) lost faith in the ability of a bank to redeem (pay) their notes, many would try to redeem their notes at the same time. If in response, a bank could not raise enough funds by calling in loans or selling bills, it either went into insolvency or defaulted on its notes. Such a situation is called a bank run and caused the demise of many early banks. Modern banking systems insure public deposits in the event of a bank failure, and thereby avoid bank runs."

The point is that if you add up the net worth of every individual in this country and then you add up the actual amount of cash available in the country, the former would dwarf the latter. The moment the public believes the money they have in banks might not be there, collapse will ensue. And the amount of money required to bail that out is beyond what even Uncle Sam can fabricate in short order.

Incidentally, I think this whole recent chapter of the financial crisis was caused by an equivalent of a bank run on investment banks that had gazillions of dollars in deposits for mortgage-backed securities. Some of the holders of those securities showed up to cash them in only to find that they were worth nothing. Word got out, and it the run was on.

2. The FDIC account that covers up to $100k of our deposits FDIC-insured banks has around $47 Billion in it. One actual big bank failure (like a Wachovia or Washington Mutual) will wipe out that fund in about two seconds and leave it dramatically in the red. And, of course, the moment that happens, the bank run mentioned above will be on.

3. Whether money in banks is available is not just important so you and I can pay our light bills, mortgages, heroin dealers, and whatnot. What happens when IBM goes to cut paychecks for the month and bank x where the checks are drawn is insolvent? That's 300,000+ employees worldwide. Of course, they could go out and get a loan for what they need while the situation is being sorted out. Oh wait - there's been a run on banks and loans are not happening. So, what happens? I really don't know. This is a level of complexity beyond my grasp, but one thing is for sure, jobs will be lost en masse and consumer confidence in the economy will take a major hit.

4. And what about small businesses who rely upon banks to handle cash flow problems? If they can't get the money they need to meet payroll and expenses, they go out of business. It's that simple. And the companies and individuals who rely upon them? They're screwed too.

5. What about my mortgage? If Wells Fargo goes belly-up, to whom do I send my monthly payment? Maybe I decide there's no one to send it to, so I stop paying it. After all, an insolvent bank can hardly afford to take me to court to foreclose on my home. (And this is all assuming MY bank is solvent and I can actually write checks that don't bounce.) But, would I own my home then? Nope - no deed. So I'd effectively be squatting on my property to claim possession. But then why can't someone come along and just take it from me? They'd have as much right to it as I do. (Whether they would have the firepower, aim, and tenacity to take it from me is another question altogether.)

5. But the police, you say. What police? The ones whose pay checks aren't clearing because the banks are gone? They'll be fending for themselves and their families just like the rest of us. Same with the power, phone, water, gas, fire, and medical people. This is not a pretty situation.

The bottom line - as I see it - is that a massive bank failure will lead directly to the worst economic conditions in this country EVER. It'd make the Great Depression look like Mardi Gras. Think about it - we have more than twice as many people in the country now, and most of them are accustomed to having it easy in life. Sure, we may struggle to pay bills and such, but we don't worry about where our meals are coming from or whether we'll be safe tonight. We worry if Tivo will clip the end of The Hills. Throw the modern American into a lawless, chaotic, and in many ways hopeless situation, and the results will be hideous.

So I'm all for the bailout because it is the one thing we can do to prevent a massive run on banks. It has to be done, plain and simple. It's quite another discussion as to who should be held accountable for our getting to where we are. And another as to what we do to ensure that it never happens again. But to reflexively be against the bailout because it goes against our philosophical predilections is to put idealism above practicality. It's time to realize that and start leaning on our politicians to make it happen quickly.

This partisan bickering over Wall Street versus Main Street is exactly what we should expect of national politicians whose primary job skill is getting power and keeping it. But it's totally unacceptable. As citizens, our discussions as to bailout or no bailout should be over. Bailout it is. Now we should turn to getting it done as quickly and appropriately as possible.

I now return you to your regularly scheduled programming.

TrackBack URL for this entry:
http://www.enlightenedcaveman.com/mt/mt-tb.cgi/132