The Federal Bailout….
While I am a proponent of free markets and allowing businesses to suffer for bad investments and poor decisions, I’m not totally sold on the Ron Paul solution of “do nothing” in our current situation.
I believe limited bailouts are needed in extreme cases (like AIG) simply because allowing them to fail threatens bankruptcies and job losses in otherwise sound sectors.
Simply put, there is a role that government should play. Albeit a limited role.
There is a good article that goes into details about our current situation and the role of government. The following are a few of the takeaways that I agree with…
1. As a general principle the government should not bail out failing firms. Bailing out firms that have miscalculated in the market shoulders taxpayers with costs that should be borne instead by those who made the mistakes.
2. There can be rare situations in which a wave of bad decisions in one sector has such dire consequences for the most basic operations of the economy that other sectors are threatened, jeopardizing the functioning of the entire economy. In these rare cases another principle comes into play: Government institutions have a critical role in helping to assure the integrity of the market’s infrastructure, from the sanctity of contracts to the liquidity of the financial markets. When government fails to carry out this role in critical times, such as its failure to maintain liquidity after the stock market crash of 1929, the results can be catastrophic. As economist Milton Friedman explained, the failure of the Federal Reserve to maintain liquidity and functioning credit markets helped trigger and deepen the Great Depression.
3. The government should not try to support prices. Policymakers should not attempt to keep stocks or housing prices from falling to their proper market-determined levels. The role of the federal government is not to ensure that prices do not drop.
4. Strictly limit legislation to the immediate need to stabilize the financial situation. Within hours of the announcement of a financial rescue plan, there were media reports that congressional leaders were considering adding in provisions on a host of other issues, including unemployment benefits, food stamps, and infrastructure and Medicaid funding. Lawmakers should oppose any and all attempts to expand the legislation being proposed.
5. Carefully define the Fed’s role. The Federal Reserve should exercise its “lender of last resort” responsibilities to ensure liquidity but avoid the unwarranted mission creep of those responsibilities to new fields.
To read the entire article click here.
What do you think?
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Comments
That is a good question. I think there are opportunities in solid and sound companies whos stock prices have plummeted.
Goldman is a good example, they are a solid company that didn’t get into the sub-prime mess and who continue to report solid earnings (no wonder Buffet just put in $5B to Goldman). GE’s stock has also plummeted and is worth more. The only problem is that they could each continue to go down for awhile, before they go up.
I dig the new design…
Yeah — global economy is struggling. In a market like this, where are the opportunities? What do you think?