The administration is wasting Congress's time with all the testimony about "the crisis" and its need for $700 billion in our money. Free markets got us into the current situation -- the market adjusting after taking on too much debt. Let free markets get us out.
First, Paulson is new to politics -- though as Goldman Sachs Group (NYSE: GS) CEO he was very successful, such success does not always translate into Washington wins. He lacks the stagecraft needed to persuade Congress and the American people of his position. Simply repeating over and over again that Congress must pass his $700 billion plan now is not working. The world has not collapsed since he decided to launch his sales campaign. Every day that goes by with the world's financial markets still intact begs the question: "Exactly what is the financial crisis that Paulson is trying to stop?"
Granted, there is some fear priced into the credit markets, but less than there was last week. Fortune reports that Treasury bill yields are still low since investors piled into them for safety -- but those yields are higher than they were before -- rising from 0.03% last Wednesday to 0.83% yesterday. And the so-called TED spread -- the gap between 3-month Treasury and 3-month bank lending (LIBOR) rates -- remains wide -- 240 basis points (100 basis points = 1%). But that's down from 288 basis points last Wednesday. I look at this situation and do not see imminent collapse. Instead I see rational investors deciding that more debt will not solve a problem caused by too much debt.
In the absence of specific evidence that a global financial market collapse is imminent, it is time for Paulson and his taxpayer-money-grubbing ilk to go away. The Administration has already spent $800 billion with various bailouts over the last six months. If left on their own, free markets will work nicely to clean out the mistakes that people made over the last several years. Companies that took on toxic waste will write down its value. If they can raise capital, they will. If not, they will file for bankruptcy and healthier companies can buy their valuable assets cheaply.
People who borrowed money that they could not afford to pay back will lose the assets that they bought with the money. If they lived in a house, the bank will take it over. They will probably go rent an apartment. Investors who lose money from their investments will take a loss and will end up paying less in taxes as a result. Fired executives and Wall Street bankers will lick their wounds and either retire or get a job somewhere else.
People who take risks -- and borrowing money is a big one -- need to pay the price if those bets go bad. The idea that just because a bank has been making campaign contributions to politicians entitles them to $700 billion of our money to bail them out of their bad decisions is poor public policy and lousy politics. Stop huffing and puffing and get real.
Free markets got us into this mess -- now it's time to let them get us out. End the bailout madness.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Goldman Sachs securities.
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Reader Comments (Page 1 of 1)
9-24-2008 @ 10:35AM
Vox Dulcis said...
http://www.cnn.com/2008/POLITICS/09/23/paul.bailout/index.html?iref=mpstoryview
9-24-2008 @ 11:51AM
Dennis Bowen said...
Peter Cohan is right on the money. I couldn't agree more with his position.
9-24-2008 @ 11:53AM
RE broker said...
How about taking the $700B and dividing it equally into every tax payers retirement accounts. It looks like the costs to each tax payor will be about $5,200.00 each. The banks get the liquidity they claim to need, and the tax payors get something to counteract the inflation we are about to create.