Banks, Bailouts, Bonuses, and Barfing

The Federal Government has been acting like a bad parent recently. How so? A bad parent tries to insulate their children from their mistakes. If their kid gets in trouble, the parent will bail them out, and often with no consequences. What does the kid learn?  — they can continue in the same behavior and get away with it again and again. Eventually they wind up hooked on drugs, in jail, or worse. The right thing to do is to let the child suffer the consequences when they mess up in little things, so they will learn a lesson, and hopefully not repeat the same mistake or move on to bigger ones.

By bailing out the banks, and not punishing the terribly irresponsible, we just encourage future bad behavior.  I know… they were too big to fail.  Why?  That’s what capitalism is all about. Survival of the fittest. Companies that do stupid things or do not adapt should go out of business, no matter how big they are. Executives that do something illegal or encourage their employees to do so should be prosecuted. That encourages companies and their leaders to act right. Instead, we bail them out, which sends the message that you can take stupid risks and your rich Uncle Sam, who’s really not so rich anymore, will go further into debt to try to fix it.

What if we had let the “too big to fail” simply fail.  Well, we would all eventually get over it. It would be really painful for a while, but we would probably rebound faster and be in better shape in the long run. If you’ll excuse the analogy, it’s kind of like throwing up.  No one likes to. You’re nauseous. You know you’re gonna be sick. Deep down you hope it won’t happen, and you think maybe you can avoid it. You drink the chalky pink stuff to settle your stomach. You sit very still and do your best not to get sick, and you’re miserable a much longer time.  Instead, if you just got it over with, you’d feel better much sooner.

Our economy was terribly sick last year, and needed to throw up bad. But instead of a good purge, we tried to delay the inevitable by bailing and spending our way out of trouble. Now we are reaping that mistake, and I think we will be for years to come.  We are more in debt than ever (800 billion to China alone), and our economy today is much more at risk and unstable than if we had just let it purge itself as it should have. Instead, we still feel sick.  We don’t want to admit it, but as waves of nausea jerk the market to and fro, we realize we’re still probably going to barf up the pink stuff in the end.

And what about these big bonuses the bailed out banks are paying.  I’m all for bonuses if you do a good job. But, if you run your company into the ground or take part in selling securities or mortgages that you know you shouldn’t be, paying bonuses seems like stupid squared. And, if in a weak moment I happen to loan you money to get you out of a jam, you’d better not buy that big screen TV until you pay me back first.

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