Friday, September 19, 2008

The Bailout

So it has been settled - the American tax payers are going to bail out Wall Street. Hundreds of billions of dollars more will have to be spent, and the American government is going to buy what no one else would touch with a ten-foot pole. Preliminarily, it looks like the government is going to spend 600 billion dollars on this part of the massive bailout. How easy it was to agree on this gigantic spending, compared to something as outrageous as, for instance, healthcare for poor children…

It is not for certain that this bailout will go as smoothly as Wall Street thinks, though. As we all know, the American government is not exactly flush with cash, and it definitely does not have 600 billion dollars to throw around. Who does? Well: China, Japan, Russia, Germany and few others maybe. So it’s going to have to come from one of these countries, and the big question is whether they believe sufficiently in the American economy to lend all this money to our dear Mr. Bush.

The spending bill will have to be approved by the Congress and Senate, and it will be approved. The alternative is off the table. Wall Street has in the American economy become a substitute for many different political policies. Through the artificial profits created by Wall Street, American workers feel like they’re wealthy, when in fact they’re not. They feel like they have a great pension plan, when in fact it’s crap. In general, they have come to see the stock market as a general gauge for how they and the economy are doing, when in fact that relationship has slim foundations at best in today’s economy. The alternative would be for politicians to create an actual social safety net for the citizens of this country, which is something they simply WILL NOT DO.

In any case, there obviously needs to be repercussions for Wall Street, but it is uncertain whether there will be any significant ones. Since American politicians seem hell-bent on continuing the boom and bust structure of the economy, my suggestion for the future is the following: create a bailout fund, into which Wall Street firms at all times must deposit 10% of their profits. This fund will obviously not be invested in Wall Street. When the next crash comes, the money will be taken from this fund, instead of the taxpayers who suffer under the control of Wall Street.

p.s. the recent bailout of AIG was illegal. The reason is that the Fed does not have the authority to bail out institutions that it does not control, unless under extraordinary circumstances. These were extraordinary circumstances, but the Fed still does not have the authority to bail such a firm out if there are other bids on the table, which there were. Legally, AIG should have sold itself to one of the private bidders and relinquished control of the company, but the Fed broke the law in order to help the owners of AIG.

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