Bail-Out: What's the alternative?

Comrades,

I was asked by a couple of readers, what the alternative to the bail-out is. The concerns are well placed. If the credit dries up, even good businesses will suffer, it will affect their day to day operations, ability expand, and make good on payments including salaries.

By taking away the bad debts from the books of the banks, one is not only rewarding bad behaviour, but also ignoring the fundamental problem - the cartelization of credit. It is a bad system; it is pyramiding of credit; and it creates a set of winners and losers, not according to their merits and demerits, but according to their ability or inability to pervert the system.

The main cause of the banking crisis is the inability of the borrowers to repay their debts.Too much credit shoved down the throat of undeserving borrowers is what caused the crisis; more of the same isn't going to solve it. The bubble also created a glut in housing and related industries, malinvestmets as Austrian Economists would call it; and that needs to be purged.

Bailing out the banks will not reverse the tightening of the credit standards. 20% downpayment will be the standard, one would hope. More over, the option-ARMs are still adjusting, which means housing prices will continue to sink, leading to further pressure on the banks. Commercial real estate, credit cards and autoloans are under stress, as we speak. So this staggering 700 billion price tag is only just the beginning.

Further more, Fed is injecting staggering amounts of credit into the banking system, with out any Congressional approval I might add. Fed's balance sheet is chock full of bad loans. The bail-out bill was intended to provide the power to the treasury to do targeted operation to permanently take the bad debt off the balance sheet, rather than general injection of new credit into the system.

Last but not least, there will be opportunity costs to the bail-out. By diverting real resources, either through taxation or through inflation, the government will be taking capital resources away from successful companies and directing it towards failed enterprises.

Chart: Monetary base

The regulators have a decision to make, whether they want to prolong the agony of pulling off a band-aid.

Contrary to popular belief, the current group of goons managing the economic policy are not freemarketers. Which is why I have often said time and again that Milton Friedmanites are Keynesians in drag. Keynes is a fabian socialist whom most leftwing economists worship openly, and their right wing counterparts worship secretly. Sure, they all talk-up a good game.

Finally, if bureaucrats and politicians are such supermen/superwomen, who could solve any real crisis in the economy ( a creation of these very people ) by waving a magic wand, shouldn't we just transfer the responsibily of planning the economy ( as to how many pencils and lipsticks to be produced per year ) to these very same superdudes and superdudettes? In other words, comrades, shouldn't we all embrace Marxism?