Can We Afford All of These Bailouts?

Reminisce with me for a moment, comrades. In just the past year, the government has imposed bailouts in the following amounts:

These bailouts should be about as welcome as malaria. I've read the Constitution. Nowhere does it say that taxpayers are the default dumping ground for mortgages made to people who can't afford them. Nowhere does it say the government shall back all derivative ventures gone astray. Nowhere in the Bill of Rights does it say you have the right to be left holding the bag.

And that's just the beginning
If I had to guess, I'd say there's more to come. GM (NYSE: GM  ) and Ford (NYSE: F  ) are itching for tens of billions, too. And what a shame it is -- every penny of taxpayer money used to bail out institutions overrun by greed and speculation is an embarrassment. It's dumbfounding. It's a tragedy and an absolute insult to capitalism.

Alas, it happened. The big questions on taxpayers' minds now should be: Can we really afford all of these bailouts, and are they worth it?

Ha! Please ...
The answer to the first one is too easy ... absolutely not. Of course not. Don't let the government fool you into thinking it has a bank account with trillions of dollars waiting to be used for bailouts. The source of these funds will come from the same mechanism that caused the problem … excessive borrowing. We're already swimming in nearly $10 trillion of national debt. The budget deficit this year alone is expected to approach half a trillion dollars -- and that was before last week's bailouts. Can we afford bailouts? The question is almost insulting. We couldn't afford our way of life before bailouts.

The concept of "No such thing as a free lunch" rings loud and clear these days. Where will this bailout money come from? The printing presses. What happens then? The dollar falls, inflation rises, and thoughts of Zimbabwe and the Weimar Republic begin to haunt you at night. Connect the dots, and someone is always left holding the bag. In the event of taxpayer bailouts, that someone becomes you. It's sickening.

Sickening, yes. But let's not get too carried away with how things "ought" to be. I can think of a lot of things in this world that ought to be different. The responsible thing to do is address what is happening and do what's necessary to put an end to it. No amount of kvetching will make the CDOs, MBSs, subprime Ninja, no-doc, and neg-am mortgages disappear. The real question that needs to be asked is: "Are these bailouts really necessary, and the best option?"

Oh yes, I happen to think they are
It's easy to say "no company should be too big to fail" or "they dug their own grave, let them pay the price." And you're absolutely right.

But again, let's acknowledge the difference between "shouldn't be too big to fail" and "is too big to fail." Bear Stearns was counterparty to derivatives with notional values worth $2.7 trillion ... with a "t." About 20%, or $1.5 trillion, of all Mac and Mae securities are owned by foreign investors who could sign the U.S. dollar's death certificate if they wanted to. No, they shouldn't have been allowed to get that big and that interconnected. But the fact is, they did. Don't blame Hank Paulson or Ben Bernanke … blame these guys.

The same people who complain about the onslaught of bailouts lack the imagination to consider what our economy would look like if Bear Stearns or AIG had to unload mountains of credit-default swaps. Or if Mac and Mae were allowed to fail and foreign investors gave up on the U.S. economy. Or if Morgan Stanley (NYSE: MS  ) and Goldman Sachs (NYSE: GS  ) were allowed to implode last week. Remember the battle scene from Braveheart? It'd look something like that. Yes, printing money for bailouts could wreak havoc on the economy. The problem is, had the financial system collapsed, there might not have been an economy left to wreak havoc on.    

But of course, I'm just guessing. What's history say about these events?

There was another period of time when the financial system was allowed to collapse and banks were allowed to fail left and right. The ensuing period was so horrific, no one dares to call it anything less than the Great Depression. Again, I'm not pro-bailout. I'm pro-reality.

Bailing out companies that dug their own grave isn't good; it's just the lesser of two very extreme evils.

For related Foolishness:                                          

Fool contributor Morgan Housel doesn't own shares of any of the companies mentioned in this article, save for the ones he owns indirectly as a taxpaying, bailout-participating citizen. JPMorgan Chase is a Motley Fool Income Investor recommendation. The Fool has a disclosure policy.


Read/Post Comments (16) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 22, 2008, at 3:27 PM, 4onthebeach wrote:

    Wasn't the FDIC set up to protect people from bank failures?? Why not let that system work? I realize liquidating these companies could be painful, but eventually prices will fall in line with earnings and growth would continue.

  • Report this Comment On September 22, 2008, at 4:45 PM, jsl4980 wrote:

    Since the answer is "no" we absolutely cannot afford these bailouts we face years of inflation before the market collapses. To me the choice is between the second Great Depression (now with no bailouts) or the Prolonged Great Depression (later with bailouts).

    At least this way the people who caused the mess get saved!

  • Report this Comment On September 22, 2008, at 5:50 PM, blm098 wrote:

    Please make sure the bailout hurts those on the top of this mess. No golden paracutes, or big financial packages. Pehaps as a penalty for ruining the economic system they should be taxed at a really high rate. Somewhere, somehow lots of people got really rich on the backs of lots of poor under-educated folks who invested and purchased things like houses that were way beyond their means. The people who are lossing their homes shouldn't be the only ones to hurt.

  • Report this Comment On September 22, 2008, at 9:28 PM, wcoastjosh wrote:

    I thought Lehman had a mountain of derivatives it had to unload, and we did not experience the end of the world when they failed...

  • Report this Comment On September 23, 2008, at 3:40 AM, GoNuke wrote:

    Reality always prevails over dogma. Economics is a form of mass psychology. Mass fear constitutes the greatest threat to a free market economy.

    To keep the economic engine generating the maximum wealth possible you have to prevent panic. Panic leads to loss of faith in the system. It is our culture of faith in the system that makes it run. Remove the faith and the system vanishes.

    It is about time the US started living within its means -it is time for higher income taxes. They should be very progressive.

  • Report this Comment On September 23, 2008, at 9:45 AM, scollins1225 wrote:

    Let's be realistic. We can't fix something that's broken beyond repair. Our nation has a $10 trillion debt... okay, if you estimate that at around 70% of the GDP we still have room to borrow - the world's economy churns on the willingness of the American consumer to take on debt - assuming there are still those willing to let us borrow. But if tack on the $60 TRILLION owed for social security/Medicare/Medicaid... there is NO WAY to meet these obligations - no tax increase could cover it. And that's not counting other costs like infrastructure, education, wars, etc... We're in some serious trouble, folks and it's going to get a lot worse before - or IF - it (ever) gets better.

  • Report this Comment On September 23, 2008, at 11:39 AM, jaywillb wrote:

    Paying higher income or other taxes is NOT the way the US needs to live within its means! Govenments and citizens alike need to curb their free-spending ways!

    If a significant portion of the populace would make the decision to pay off all debt and stay out of debt, the wealth of the USA would eventually be rebuilt. We would then be able to transform from a debtor nation to an economoically strong and sound nation.

    This doesn't start with Federal, state or local officials - it starts with each of us taking personal responsibility for our finances. Only then will those in government get the message!!

  • Report this Comment On September 23, 2008, at 6:40 PM, sdbsdb wrote:

    I'd suggest that everyone read the following article, which describes what Sweden did when it was in a similar situation:

    http://www.nytimes.com/2008/09/23/business/worldbusiness/23k...

    I'm sure Paulson, Bernanke and our Congress are not too arrogant to learn from the experiences of others...

  • Report this Comment On September 24, 2008, at 10:59 AM, SolarInvestor wrote:

    Every pro-bailout article I've read predicts that the whole economy will collapse if we don't bail them out. I don't believe it. Banks will fail, and the FDIC will insure the deposits. Oh wait, the banks that are failing have no deposits. And I sure don't believe we should just be handing over 700B to the same people who said the banking system was fine just a few months ago. This is just another way for the Bush Admin to give his friends more money to stuff into their pockets. He didn't loot us enough with war and gas. 700B is $2000 per person in the U.S. That would be $10K for my family of 5. Give that to the people and see the economy soar.

  • Report this Comment On September 24, 2008, at 11:00 PM, GoldorTin wrote:

    The lesser of the two evils is to let it fail. The bailout is fascist move and should not be done. The economy will collapse either way and the bailout will put the high inflation rates of the President Carter era to shame. Hold on tight we are in the midst of a depression that will put the previous one to shame.

  • Report this Comment On September 26, 2008, at 11:19 AM, kwill10 wrote:

    You know, the southeast is currently recovering from a gasoline shortage in the aftermath of Ike. The shortage is about 25% due to refinery shutdowns and about 75% due to the hoarding of gasoline by people in a panic; experts have explained that our gasoline distribution system isn't designed to handle everyone having a full tank of gasoline in their cars at once. There were certainly some bad decisions that led to the current financial crisis; however, some traditional banks as well as Morgan and Goldman were getting hammered despite profitability due to investor panic; I see the "bailout" as a pledge to restore confidence to prevent a "hoarding" of credit like the gasoline situation. Do I like it? Of course not; but, I agree that it was a necessary evil.

  • Report this Comment On September 26, 2008, at 2:03 PM, spongeworthyusa wrote:

    Solarinvestor said: "Every pro-bailout article I've read predicts that the whole economy will collapse if we don't bail them out. I don't believe it."

    I agree. Everyone, including and especially leading politicians such as Bush, McCain and Obama, are saying things will be terrible if the Wall Street failed capitalists aren't bailed out but no one, not even supposedly respected economists (heck, even not-all-that-respected economists like those that spout off on the MF), have said anything SPECIFIC about what could happen.

    Hey, I believe that credit will dry up. But I couldn't possibly care less because, though I have great credit, I use very little of it. I suppose it's possible my S&L could call the note on my mortgage but why would they when I've never been late or missed a payment in 16 years?

    People are giving all these doom and gloom scenarios where businesses can't borrow to expand or they can't borrow to meet a payroll. So what? if a company has to borrow a ton of money to expand, maybe they shouldn't expand. If a company needs to borrow money to meet payroll, I'm going to suggest that company is on their last legs anyway.

    Come on, MF... Give us a credible, supported, scenario of what might happen if the $700,000,000,000.00 bailout was to happen vs. if we let the free market work the way you've always said they can, should and would.

  • Report this Comment On September 27, 2008, at 1:43 PM, hdlady wrote:

    my biggest question is where are all the working people, who have been advised for years "put your money into the stock market" to turn as they watch their hard earned money turn to rust? or the widow, retiree, who has most of thier equity wrapped up in bonds(gm), and other equities for income? Anyone who has a 401K, pension has a little piece of all the pie.

  • Report this Comment On September 27, 2008, at 1:48 PM, hdlady wrote:

    this will come as a communist or socialist idea. those at the top of all companies making milllions, should be taxed for it and made to pay half of thier profits back into the the companies that are failing. why are these companies failing? those at the top are making poor decisions, earning their millions that are causing the hardships for the companies.

  • Report this Comment On September 29, 2008, at 5:23 PM, veeveeorr wrote:

    Pray, wher are those two idiots who wrote that the Stock market was undervalued and should be around 30,000? Are they hiding or hybernating?? Probably, they are enjoying the riches from their book sales!

    If the government does not come to the rescue and bail out, we will all be learning Chinese and Arabic and our children and grandchildren will be no more American citizens!

    Wher did the wisdom of the Congress go when Bush went into an illegal war? These representatives voted to continue the war with no end in sight!

    Where did that money come from?

    veeveeorr

  • Report this Comment On November 17, 2008, at 3:23 PM, gerackie wrote:

    Why, oh why, does the money have to go to the people who screwed us over in the first place? Instead use it to extend/raise unemployment benefits for those who lose their jobs because somebody a lot higher on the ladder was greedy, and to prevent retirees from losing everything they worked for all their lives, and I guarantee that small and medium businesses will survive and thrive to provide the recovery of the economy. Let the big ones fail, the only people that really hurts are the ones losing their jobs and they would be best helped by extending and raising unemployment benefits. Oh, I forgot that would "hurt" the fat cats, better give them the money before they have to trade in the gas guzzler(sssss) and send their kids to public school.

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