Too Big to Save
By Robert Romano
In the debate over moral hazard, one argument often made is that certain institutions are simply too big to fail. That, if they are allowed to fail, the greater economy will be irreparably damaged, and the people will be unnecessarily hurt.
The reality emerging, however, is that the crumbling financial system is, in fact, too big to save. And the bailouts themselves are irreparably damaging the economy, and yes, the people are hurting badly as a result. Unnecessarily.
On March 2nd, the Treasury and Federal Reserve unveiled the latest bailout for troubled insurance giant AIG—another $30 billion from the Troubled Asset Relief Program (TARP) for a grand total of $173 billion thus far. This follows a long line of bailouts for this company—and others—that come in for money, and then show up just months later looking for yet more when the last bailout fails to return the company to profitability.
The argument being made by the Fed and Treasury, as reported by yesterday by the Wall Street Journal in “AIG's Black Box,” is that these companies are “systemically important”—or in other words, too big to fail.
Under that comes everybody that has latched on to the TARP or the Fed's discount window for cash: banks, creditors, investment firms, insurance companies, automakers, and on down the line.
To be certain, the bad news keeps rolling in. GM and Chrysler have received a combined $17 billion from TARP, but as Bloomberg reports, the companies are still descending into insolvency as sales figures come in worse than expected. They will likely follow on the heels of AIG and return to the Treasury with hat in hand, begging the taxpayers for more loans that they probably won't be able to pay back.
Another example of government failing to plug a hole in a dam that has already broken is its ill-conceived foreclosure “prevention” schemes. In 2008, Congress dedicated some $300 billion for that purpose, and yet 2.3 million foreclosures happened anyway. In 2009, the Obama Administration is proposing another $75 billion to “prevent” foreclosures.
It gets worse. Last year, Congress spent some $200 billion to purchase Fannie Mae and Freddie Mac debt. Since TARP, the number's up to $600 billion for purchasing mortgage-backed securities—which were sold by the Government Sponsored Enterprises all over the world with the implicit backing of the federal government. And now, this year, the Obama Administration wants to allocate another $200 billion for Fannie and Freddie to reduce mortgage rates for those who cannot pay at the expense of those who are making their payments on time and in full.
Stand back even further, and the picture only grows grimmer. Last year, $150 billion was dedicated to economic “stimulus.” This year, the number grew to $787 billion. Last year, $700 billion was dedicated to the Troubled Asset Relief Program, much of which still cannot be accounted for. This year, President Obama makes TARP a line on his budget—another $750 billion—“just in case.”
Does anyone see a pattern here? We do. The bailouts are not working. They have all to date proven to be insufficient at addressing the structural problems internally and externally that prevent these companies from returning to solvency and self-sufficiency. They should be allowed to fail. Allowed to go bankrupt. And allowed to be gutted by market forces.
Instead, these businesses are rapidly becoming nationalized as de facto agencies of government; yet more lines on the budget. What is happening is akin to the people of Pompei that were showered and solidified in volcanic ash ages ago. Neither will return to life any time soon.
Meanwhile, it is the issues that government refuses to address that are all the more disconcerting for the American taxpayer.
To date, Congress has not voted upon any proposals to restore price stability by eliminating the dual mandate at the Federal Reserve—it was easy money from the Fed that accommodated excessive lending that created the housing bubble in the first place. Nor has there been an up-or-down vote to reduce spending, balance the budget, pay down the national debt, and get America off its addiction to foreign credit, which further allows this unbridled spending spree to continue unabated.
The icing on the cake, though, is President Obama's proposed $3.6 trillion budget that will expand the deficit for 2009 to $1.75 trillion. The national debt will grow to well over $11 trillion. One can almost hear the American taxpayer's head exploding.
The debt being placed upon the American people is a heavy burden that they did not ask for, did not vote for, and is one that can never possibly be paid back.
The dawning reality is that these companies: AIG, the automakers, the banks, the housing sector—indeed, Big Government itself—are not too big to fail, but too big to save.
And that case must be made loud and clear to lawmakers before they proceed even further into the breach. Before the economy is irreparably broken and the nation forever bankrupted. Before the people becomes slaves to the national debt. In short, before it is too late.
Robert Romano is the Senior Editor of ALG News Bureau.