US Credit Crunch and the Bailout Blunder

In case you haven’t noticed there are a lot of frantic economists running around right now talking about the credit crunch.  Of course they’re also pleading with the US government to dig up another 700 billion dollars (did you know that’s nine zeros?) to give to the banks that are about to fail.  I suppose that it’s expected that we should be concerned about banks failing and the stock marketing falling and rising unemployment, and all that stuff.  But I’m really surprised at the response of the poeple.

So, is the credit crunch really the problem?  The only thing I can think about is a slight modification to the story about the emporer has no clothes.  Imagine that the little boy, you know, the only one with courage to state that the emporer had no clothes on.  Well, imagine that instead of saying that the emporer had no clothes instead decided to point out that his clothes were so fine and exposing that all of the engineers in the empire needed to undertake a weather modification project to ensure that around the emporer the humidity, temperature, etc. were just right.  Of course, the money for the project goes to the same engineers that provided him with his *new* space age outfit.

Does that sound a bit far fetched?  Well, essentially what we’re doing is taking 700 billions dollars against the deficit (they’re guaranteeing it with the US taxpayer) and giving that to the same people that started the mess in the first place.  This, they are hoping, will inspire those banks to loan money again to other people that don’t have enough operating capitol.  Those who borrow are hoping that others will also borrow to purchase their stuff and so we all go happily along our way still living on debt, except that for a while we can pretend that we don’t have a problem.  Didn’t we just make the whole 700 billions dollars deeper?  Do we really want to end the credit crunch?

Well, I’m sure that many will be quick to point out that I’m sooo old school.  “No one lives on cash any more…” They’ll tell me.  Well, I remember learning when I was young that you spend less than you make, and so I do.  One of the most surprising things I read recently was commentary about the house first rejecting the bail-out package.  In particular was the commentary by JOHN CAPIN, where he states that his entire business relies on credit.  I would be embarrassed to say that my entire business was teetering on the brink of oblivion because I didn’t operate within my revenue, but relied on credit.  How do you think his employees feel knowing that their payroll is tied into his credit?  That’s freaky

The other thing that’s so strange to me is that the discussion over the 700 billion dollar bail-out seems to be a matter of who gets the money, not whether we do it.  What I mean is that the vocal group opposing the bail-out think that the money should somehow come back to the people, not to wallstreet.  Why should there be one in the first place?  I might be wrong on this, so add your comments, but if it’s true, GIVE IT UP!  Take a minute and think to yourself, why should we borrow any more money against our current deficit, when using money that’s wasn’t on hand to begin with is responsible for this whole mess?

So, the credit crunch is hard for America because of an excess of American Entitlement and a complete lack of American Accountability.

Whoo.  After that whole rant, let me say that I’m not ignorant to the pitfalls of not doing anything.  The godfather of investing, Warren Buffet, is articulate and clear on the subject in this video.  But I wonder how he, or anyone else in the financial industry, would explain the way this can work without just putting off the collapse.  Can this somehow really prevent the recession (if that’s really what’s going on)?  If so, how can more debt save us from bad debt?

I admit that I’m far from an expert, but there are a few principles that I grew up with (and I thought were very American), that no one seems to be on board with anymore.  They are:

  • Live debt free
  • Don’t buy when someone is pressuring you (like congress pressuring us about this bail-out deal)
  • Spend less than you make to build up savings

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