The Bush Administration should be praised for saving the day and bailing out near-bankrupt banks and other financial institutions. But the plan that envisions pumping a half-trillion dollars of public money into the market may easily backfire.
One of the basic rules of the free-market economy says that good companies profit while bad companies go bankrupt. For example, when in one area there are two stores selling similar goods, the one which provides better quality for a lesser price will flourish whereas the other will inevitably be closed. Banks are no different. If they invest their clients’ money smartly by buying safe stocks and giving loans to reliable people, they will strengthen their position on the market. But should they dole out millions of dollars to individuals and firms of questionable reputation, they may one day find themselves in big trouble. That’s exactly what happened in the United States.
Suddenly, someone discovered that banks’ treasuries were largely empty. One bank after another fell or, like Freddie Mac and Fannie Mae, had to be saved at the eleventh hour by the federal government. Lehman Brothers was less lucky. The over 120-year-old institution with some 639,000 customers filed for bankruptcy reporting debts of $613 billion and admitting to a number of “unsecured” debtors from all over the world, who had borrowed from the bank hundreds of millions of dollars. The wave of bankruptcies in the United States has spurred a worldwide crisis that has seriously affected even those countries with more reasonable institutions than their American partners.
It is easy to blame President Bush or Republicans for the present crisis. But it was neither the president nor Congress that told American banks to shut off their common sense and lend huge money (their clients’ money) to whoever wanted it. This has nothing to do with politics but with old-fashioned human greed. Enticed by low rates and no checkup policy, hundreds of thousands of people rushed to banks to fund their big and small dreams, regardless of their financial capabilities. As some newspapers informed, even the unemployed who lived on welfare were awarded mortgage loans. It all worked well until banks realized there was no way to get the money back.
The Bush Administration stepped in quickly and decisively. Whatever bad can be said about the president, the current stabilization is much of his making. But bailing out bankrupt companies is a temporary solution and may hit back in the future. First of all, it sends a signal that banks can keep acting irresponsibly because the federal government is here to buy their debts. Naturally, this policy cannot last forever; otherwise it will ruin not only millions of creditors, but the entire country. Second, the federal intervention in the market breaks the basic rules of the liberal economy. It is not inconceivable that soon the United States will turn into the leading socialist nation in the world.
What is the alternative? As always, there are no magic formulas that could quickly and painlessly stop an economic crisis. In this case, banks should take the blame and let the free market decide which of them are strong enough to survive and which have to die. Without a doubt it would seriously hit ordinary citizens, but at the same time it would purge the economy of sick and weak financial institutions. The next administration and Congress must introduce reforms that would prevent similar downfalls in the future. Many European countries have already implemented proper regulations so President McCain or President Obama will have enough examples to draw from.
The United States have flourished for so many years because the federal government has stayed away from the economy. But this policy – accepted by all administrations – has also given companies the wrong idea that everything was allowed. Now, banks worth billions of dollars are being nationalized and the cost of this operation will have to be financed by every American who pays taxes. The road from capitalism to socialism is short, but it takes much longer to reverse the course.