Bailout bull and the budget crisis (written Dec 2009)

The Facts

I'm just an average citizen, but over the last six months I've stood by and watched the government make big mistakes – at least in my mind. Here are some naked facts that stick out at me:

1. The current national debt is $10 Trillion.
2. Bailout#1, the Economic Stimulus Act of 2008, cost tax payers $152 Billion.
3. Bailout#2, the Troubled Assets Relief Program (TARP) 2008, cost tax payers $700 Billion
4. Bailout#3, the American Recovery and Reinvestment Plan (ARRP), cost tax payers $838 Billion
5. The current interest payment (only) per year on the national debt is $240 Billion (9% of the total federal budget).
6. Omnibus Appropriations Bill (March 11, 2009) cost $410 Billion (containing 8,000 earmarks which add $5.5 Billion in special interest projects)
7. In a recent news story, Obama details his plan to add another $634 Billion as a down payment to cover the cost of “universal health-care”. My guess, this is just the tip of the iceberg.

When will the spending end? Where does the money come from if they are not increasing taxes? How much debt is too much?

The Problems

To me, the dead elephant in the corner is the national debt. It is growing at an alarming rate and few politicians ever bring it up. The ultimate burden will fall to the next generation. The country's financial situation is already in a deep mess without taking on more troubles.

Politicians are interested in convincing themselves and others that the “economy is in a severe crisis” and that only “government help” can save the situation. I do agree that the economy is in bad shape, but I strongly disagree that the government holds the solution.

Elected officials are leveraging fear to get their way with the nation – sometimes their actions are even perverse. For example, I watched an interview with Bank of America's CEO, who recently had taken $25 Billion from TARP. The Bank executive told the reporter that they did not need the money, but government officials asked them to take it anyways. Something didn't sound quite right with this.

Later, we learn that the government gave the nation's top 10 banks money so that no one would know which banks were weak and which were strong. After receiving the government money, Bank of America purchases Merrill Lynch. I'm sure that this required little government cajoling, since Merrill Lynch cost less than the $25 Billion that the government already gave them. But, they had no idea what they were getting into. Now, the government (and FDIC) is promising Bank of America an additional $138 Billion due to the losses incurred from Merrill Lynch's “toxic assets”.

With the whispers of nationalizing certain banks, I fear that there will be no way to turn around the situation. Officials state that government control will be temporary, but I don't believe it. Once government gets control, I predict that we will hear a never ending list of reasons why returning the bank to the private sector will be detrimental to the best interest of the country. Government controlled banking does not work. Where is the competition? Because there is no choice, there is no competition. If government controlled banking worked, the USSR and other communist countries would be the dominant economic powers.

You might say that greedy capitalism got us here, but do really think that governments contain only righteous men? If the government is in charge and you have a problem, who do you turn to for help? Even though capitalism isn't perfect, government involvement should be minimized and used to temper the greed and corruption of men. Government must maintain neutrality with the business section. If it doesn't (by actually competing in certain sectors), how can it arbitrate?

What irritates me is that our government continues to throw good money after bad – rewarding poor business decisions with “bailout” money. As another example, the AIG bailout price tag is soring towards $150 Billion, and I do not see an end in sight. Are we giving AIG magic beans? I mean, do we really think that these executives will do something extraordinary and somehow turn their company around?

Tossing money at the problem, without real analysis, is irresponsible. The current economy is like a person with a virus, it cannot be treated with quick shot in the arm, we just have to ride out the fever.

I knew that once the government bailed out AIG, soon others would soon have their hands out. Sure enough, the automotive industry was the first at the door. Favoring one company or industry over another cannot be the policy of our government – which is supposed to be neutral concerning such matters.

Even though there is supposed to be “unprecedented scrutiny” and auditing, we're asking the same people that put their companies into dire financial shape to exercise better judgment with taxpayer money than they did with their own investor's money. Why do we think this will work?

It is easy to get caught up in the current financial tornado and forget where you are. I return to my original premise, the national debt is out of control and we need to find the basement.

Recently I read an the excellent book called, “Where Does the Money Go? Your Guided Tour to the Federal Budget Crisis” by Scott Bittle and Jean Johnson, where I learned some sobering facts that cannot be ignored:

1. Let me repeat for emphasis, the current US federal debt is $10 Trillion!
2. In the next two decades, the US population will age dramatically (over 80 million baby boomers will be retiring), and relatively fewer workers will be asked to support ever-larger costs for retirees with Social Security and medical payments.
3. Health care costs are a significant part of the US federal budget and represent 25% of the total outlay of all government spending. Social Security represents another 21.5%
4. Health care costs are rising 2.5% faster than the GDP.

So, it is stunning to me that government officials are completely ignoring the poor shape of our finances, only to make matters worse by bailing out troubled companies. My favorite quote:

Former U.S Comptroller General David Walker, the federal government's auditor, calls the baby boomers' retirement a "demographic tsunami" that will overwhelm the federal budget. By 2040, there will be little money for anything else other than Social Security, Medicare and interest on the debt -- unless something is done.

If you should listen to anyone, it should be the financial traffic cop of the country.

My Proposal

1. Stop bailouts and expedite the bankruptcy process by removing roadblocks.
2. Break up, through the normal bankruptcy process, any institution asking for government money: AIG, Fannie Mae, Freddie Mac, any Automobile company, any Bank, and any other insolvent company
3. Stop the stimulus – this is just another name for a bailout
4. Reduce the budget, at the federal, state, and local levels and face long and short term financial realities
5. Encourage private investment and loans to projects promising innovation though tax incentives. Continuous innovation is the only real solution! We need to inspire, encourage, and look for ingenuity to get us out of this situation.
6. Rethink the current tax system and aggressively pursue a better proposal like the FairTax proposal, because it has many more benefits than liabilities.

Why

1. The national debt is out of control and it should not be increased.
2. Poor business judgments should not be rewarded. Government bailouts reward poor decision making.
3. The only reasonable component of the stimulus is the tax relief – since it lifts burdens from the consumers.
4. The State and Local Relief component of the stimulus rewards the poor decision making by the governors of those states. Let's face it, every state is suffering reduced revenues due to a downtrodden economy. Regrettably, just like in the private sector, this means making cuts and trimming spending. No one likes layoffs or reduced services, but everyone has to face difficult choices and governors should not be exempt.
5. The stimulus is a temporary remedy, but it is not a real solution. It may have positive short-term benefits, but history shows us that it only prolongs economic recovery. Unfortunately, these projects will allows government to compete and crowd out private growth and investment.
6. The bankruptcy process will stimulate growth because new, more agile, companies will spring up.
7. Many smaller companies mean more competition, which is good for consumers all around.
8. Toxic assets will be sold off as a loss, but at the best possible value determined by the market. Since we are breaking up these large corporations, the losses will be spread among the many smaller, but stronger, surviving companies.
9. Generally speaking, it is not in the best interest of a society when large companies have a significant influence over the economy – like Fannie Mae and Freddie Mac. Therefore, by breaking up these giant corporations, the public will be less affected by a failure of any one of its off-springs in the future.
10. The government needs to take responsibility for its part in the overall economic downturn.