Since the financial crisis began nearly a year ago -- when the government helped JPMorgan Chase (NYSE: JPM ) bail out Bear Stearns -- I've been wholeheartedly against the way our leaders have handled the situation. As a strong proponent of free markets, the bailout of General Motors (NYSE: GM ) , I've had chills run up my spine at the sight of all of the assistance to banks (such as PNC's (NYSE: PNC ) acquisition of National City) and the injection of capital to keep the likes of Citigroup (NYSE: C ) buoyant.
While investors have not responded kindly to much of the action, many Americans -- 68% according to a recent MSNBC poll -- give the thumbs-up to President Obama's plan to revive the economy.
Of course, we humans are impatient. And the government's moves thus far all seemed as if they were quick fixes to the massive crisis. But now, our government has accumulated a bailout tab upward of $10 trillion, and there has yet to be even an inkling that the spending is sparking any economic growth -- GDP dropped by an annualized 6.2% in the fourth quarter. Continuing in this direction could make Ben Bernanke's call of a possible market bottom by 2010 off by more than a decade.
Allow me to explain …
When the government takes our tax dollars and invests them into businesses on the brink of failure, they are effectively stalling the growth of our economy; large sums of capital are being employed in risky assets that have a high probability of remaining unproductive. Yes, they are saving jobs now, but they are artificially keeping underproducing businesses alive, which will ultimately stall the growth of our nation in the long run. Rather, the government needs to let these businesses fail so that we are left with businesses that will generate long-term productivity and positive returns for our economy as a whole.
Patience is a virtue
The bailouts are undoubtedly cushioning the blow. However, attempting a speedy recovery will be costly and will postpone recovery. We cannot be hasty about this recovery. We spent the better part of a decade writing bad loans, spending excessively, and leveraging to obscene levels. Consequently, it will take us a long time to unravel those mistakes and to resume a normal economic state. That's the penalty we must pay for abusing the free markets. So, how do we let that play out?
Economic growth (i.e. GDP growth) is achieved through two methods:
- Grow the labor supply.
- Increase the productivity of that labor supply.
None of the government's actions to date play to these actions. The recently approved $787 billion stimulus may appear to coincide by creating jobs, but its effect will provide temporary relief. This is because by artificially creating jobs, worker productivity will not be optimized.
Free markets lack rules and regulations. That luxury provides each and every one of us the chance for unlimited opportunity; however, it comes with the chance of failure. We must allow our economy to naturally flush out the underperformers and the less productive entities. We must naturally create incentives for people and businesses to work and produce as efficiently as possible.
By intervening in their current form, the government is effectively ruining that process. I don't advocate intervention, though I recognize that our leaders, historically, have always mediated the economy to a certain degree. If anything, why not spend to educate Ford (NYSE: F ) employees and train them for a future job at a corporation that adds value to our economy? Or how about giving tax breaks to companies such as Google (Nasdaq: GOOG ) to help encourage thriving businesses to expand and hire (rather than lay off) workers? Keeping Americans employed is vital to our economy. But keeping them working in failing businesses will not increase the productivity of our nation.
At first I was afraid, I was petrified … but I'll survive
Like the tech-bubble era, we can survive this crisis without a massive government intervention. Think of this period as a housecleaning of our economy. We will wipe away the parts that ultimately don't belong in a prosperous economy in the same way we allowed the unprofitable dot-com companies to go under. Only the strong survive.
Rising unemployment resulting from entities that fail will be very painful in the short run. But new businesses will form and technology will improve as individuals seek profitable ventures. And as a whole, our economy will inevitably grow more robust than it ever was. It will be a long an distressful period, but it is what will ultimately allow America to emerge from this recession in its strongest form.
It's too late to go back on the decisions that have already been made, or take back the money that has already been spent. But for the sake of our economy's future, I ask our leaders to stop mugging our nation and to let the free markets govern us back to prosperity.