Public Finance: Which Road Shall We Take?

Socialist

Socialist?

Americans are facing one of the most difficult financial crises of the last half-century. If you are not polished on your conservative monetary and fiscal policy (the two are very different), this can serve as a bit of a primer.

I’m going to skip most of the background and simply state my viewpoint and let anyone that wants to offer their opinion do so.

First, your essential reading material.

Required Reading:

Recommended Reading: 

A couple of key points in the reading above:

  1. This bailout is not required and should never be required.
  2. This bailout can be avoided.
  3. This entire financial issue could have been avoided had legislation been passed in 2005.
  4. SEC Chairman Chris Cox, U.S. Treasury Secretary Hank Paulson, Federal Reserve Chairman Ben Bernanke, House Financial Services Chairman Barney Frank, and Senate Banking Chairman Chris Dodd all had the sacred trust of alerting the public, as appointed/elected officials of a government of the people to warn us before it was too late. This is an implicit violation of the sacred trust we place in elected officials.
  5. Fannie Mae and Freddie Mac are inherently destructive to the greater free market and the lesser mortgage industry as government subsidized enterprises (GSEs).
  6. If the Congress determines there is no better alternative to the current bailout strategy, power must not be consolidated to a single individual and that power must be subjected to supremely qualified oversight of the highest ethical regard.
Obviously, I bring some presuppositions to the table. With that having been said, I feel it is extremely important to state my overriding monetary opinion: the free market should decide who lives and dies financially.

I am not responsible for this mess and neither are millions of taxpayers. Regardless of the amount authorized for spending to stabilize the markets (currently, $700 billion) and regardless of the how much the Treasury will recuperate through the revaluation and sale of those illiquid assets back into the market, the government should not intervene in the function of the free market.

Does this imply there is not a need for oversight or regulations that are sensible while promoting capitalism? Of course not. A few examples:

  • The ‘mark to market’ practice needs elimination to prevent rapid devaluation of assets where their real value cannot be determined.
  • The practice of banks bundling mortgages and selling them to a GSE or in a market without a sense of the risk or total collateral value backing the notes requires far greater transparency.
  • Should GSEs exist in the first place? Of course not, we should regulate to prevent unnecessary government intrusion for a change.
  • Should executives get paid to fail? Absolutely not, morally. Capitalism however leaves it on the negotiating table. If private companies are so foolish to negotiate that accountability incentive away from their executives, that is to their detriment.
Oversight and regulation is needed to prevent unnecessary government intervention and the preservation of the public’s trust in private industry. It should not, however, seek to limit the natural function of the free market.

Aside from regulation, what do we do now? Well, I do not think a bailout is inherently necessary. The market would correct itself naturally. Unfortunately, it appears the government would rather assume the illiquid assets and hold them with taxpayer money in an attempt to stabilize the markets. This will weaken the value of the dollar globally, lead to unnecessary inflation that drives prices higher, force a recession with significantly higher interest rates and unemployment, and the credit markets will be underwhelmed for the short-term at a minimum.

Unfortunately, doing nothing will have the same effect only more swiftly and dramatically. Since we are headed down the bailout route, I think we could greatly help ourselves by doing the following (in addition to what I already listed above):

  • Immediately cease all discretionary household spending.
  • Immediately pay off as much debt as possible, starting with high-interest.
  • After debt pay off, immediately save as much as possible and deposit in the banking system (it is FDIC insured up to $100,000 per account and helps recapitalize the banking system and reducing taxpayer funding).
  • Insist power be vested in a board, not an individual, with necessary structure and oversight to ensure the process is just to the taxpayers.
  • No hedge fund bailouts and no foreign bank bailouts until domestic bank bailouts are completed.
  • Place compensation limits on executives that require taxpayer funding as penalty for requiring the bailout and to restrict the unnecessary public capitalization of private firms.
  • Remove Representative Barney Frank and Senator Chris Dodd from their committee chairmanships for incompetence and/or willfully misleading the public.
  • Reform the entire U.S. financial regulatory system to better promote the free market, increase transparency and accountability, and seek to remove all government subsidy from the industry.

In addition to these objectives, I would also encourage the following fiscal policy:

  • Require the balancing of the federal budget and the elimination of national debt, or, capping the debt at a value close to 0.00% of GDP.
  • Maintain low taxes and eliminate tax increases to ensure the perpetual stimulation of economic growth.

Now the question becomes, which road shall we take? Would the recommendations above be easy to accomplish? Absolutely not, however, American ingenuity has never relied upon ease of implementation.

Our global leadership and stewardship is in question. It would be wholly unlike Americans if we fail to answer with crystal clarity that we are more than capable of the task.

Now it is your turn to contribute to the national conversation… what say you?

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