Fallout From Government Bailouts

The Irish banks were bailed out. Now that the weather has turned colder, it seems appropriate that the world’s financial eyes turn south to Spain and Portugal. No doubt, the situation there is what American GI’s used to describe as a SNAFU. Situation Normal, All Fucked Up.

Let’s assume the bailouts happen. What is the real fall out of all these government bailouts? The Financial Times had one line in one article that everyone should shudder at, “Another big concern is the dramatic reduction of competition likely to come as a result of the bail-out.”

Now that governments own the banks, things are going to change dramatically.  Less competition means increased costs.  The average joe will pay more for bank services.  But those costs are pennies compared to other costs that are going up.  Banks will charge a lot more to transact loan business there. Standards will be much stricter, and capital will flow less readily.

Following quickly behind these bailouts will be regulation.  The bureaucrats will want to tinker with every piece of the system.  Taxes, fees, qualifications, capital ratios all will be fooled with.  That means more paperwork.  The only winners will be paper companies and lawyers, and probably government workers.

A less competitive environment limits the public’s freedom. With less choice, they are forced to take what is given to them by the now government constructed monopoly.  The worst thing in the world is a government that has a monopoly.  If you think corporations relinquish monopolistic control grudgingly, wait until you see what a government does.

Because banking is money, people’s economic freedom will be encroached upon.  No society can remain free when economic freedom is compromised.  This is why dictator’s always go for the banking system after they get control of the army.

Once governments own the banking system, they can choose who gets capital and who doesn’t.  Picking winners and losers.  Many admire the Chinese and their central planning.  But the government is the one pulling the levers, not an independent banker making an informed economic choice in an office. Capital in all countries is tied up today and not flowing.

The US is not that much different the Europe.  Our banks made some stupid decisions, and were bailed out.  The Federal government owns pieces of different banks.  It also owns a lot of the bad paper that was created.  New regulations were passed in Dodd-Frank Fin Reg “reform”.  They are still being written today.  People like CFTC Chair Gary Gensler are licking their chops with the control over the market place that they have been given.

That, my friends, is why capitalists would have rather taken the painful process of watching the banks go broke.  When the dust settled, and the ashes swept away, the economic freedom that existed pre crash would still remain.  Instead, it sits in the palm of the hand of a government bureaucrat.

The end game for all this is big banks will get really big.  They will merge, governments will buy their bad debt and hope it eventually turns positive.  This will allow governments to try and exert more control over the marketplace.  If the debt stays bad, eventually governments will write it off and charge the taxpayers.

UPDATE

Ha, I didn’t know that when I referenced Gary Gensler that the WSJ would be doing a lead editorial on the dark lord, I mean CFTC chair.  The theme of the editorial ties in perfectly with the theme of today’s post.  Government will usurp economic freedom, which eventually usurps all freedom.

Businesses with good credit that have never had trouble off-loading such risks might have to put up additional cash at the whim of Washington bureaucrats, or simply hold on to the risks, making their businesses less competitive. Companies that make machine tools, for example, want to focus on making machine tools, not on the fluctuations of interest rates or the value of a foreign customer’s local currency. So companies pay someone else to manage these risks. But Washington threatens to make that process much more costly

I’m telling you, we need a WikiLeak on the Fin Reg debate, and ensuing writing of the regulations and the Health Care debate, along with the ensuing granting of exemptions. These two bills will affect your personal life more than Iran having a nuclear bomb.

Click the link and read the whole thing.


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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