The house always wins. Sure, you might get lucky and walk away unscathed a few times. Sure, beating the house may garner some bragging rights and with your winnings you might buy your friends a round of beer. Sooner or later, you’ll lose. A few winning streaks might entice you to place a big bet – you might bet your pension, your house, your car. After all, the bigger the bet, the greater the pay off. My advice: don’t place that big bet. Walk away. What agitates me is that Obama just placed the largest bet in American history – a $787 billion dollar bailout plan.
While clearly not an economist by any stretch of the imagination, Obama does manage to place a great spin on the downward economic spiral. He explains, “what you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal, if you’ve got a long-term perspective on it.” Translation: The economy can only get so bad, at some point it has to bounce back.
I agree. However, when the solution requires betting that deficit spending will bail out failing industries, I question Obama’s faith in the free market. Already the market has responded to the $787 billion dollar bailout bill; as of last week, it dropped below 7000 – the lowest since 1997. It may go even lower.
Massive deficit spending is not only risky, it’s bad fiscal policy especially with this amount. The hope behind such spending is that it will increase government purchases and thus create a market for business output which will then encourage consumer spending. According to Keynesian economists, this will stave off, or at least slow, a recession. On the other hand, common sense tells us that the government borrows money to invest in failing institutions, the immediate result may stimulate some growth, but ultimately this is unsustainable and will lead to collapse.
Here is my school grade explanation: If I have a lemonade stand that costs more to operate than my profits, I will go bankrupt and become unemployed. The government, not wanting this to happen offers me $100 to “stimulate” me. Now, if I don’t change my business practices, this $100 will disappear I’ll be on the fast track to Chapter 7. Alternatively, I may be able to tweak my business practices and ultimately remain successful. But if my lemonade stand is truly a lemon, and other stands know how to profit from life’s lemons, government bailouts may keep me in business, but the taxpayers will be footing the bill and at the end of the day I’ll still be approaching bankruptcy.
This is Obama’s solution, but on a massive scale. Imagine pouring millions and billions of dollars into businesses that have been losing money for years. This is exactly what is happening. Businesses lose their competitive edges and the government, not wanting them to fail, offers to bail them out. The mortgage industry, the auto industry and states all get a handout.
At best this will slow the recession. It’ll take longer to recover, but we’ll eventually pull out of it. At worst, the bailed out companies will fail, unemployment will rise and we’ll be in the midst of a depression. Then we’ll be back at square one: letting the market its course.
My mom often chastised me when I had a bruise, “Don’t touch it, you’ll only make it worse.” There needs to be some of that motherly advice to the markets – don’t exert too much control correcting the markets, doing so might feel good, but it’ll take either longer to recover, or the situation will worsen.
Either way, Obama is taking an enormous gamble with America’s future. While I am skeptical, I cross my fingers and pray that this bet will pay off.