Washington DC, September 30, 2008 --  

The collapse of the Wall Street bailout plan is welcome news for those concerned about America's long-term financial health.

The stunning collapse of the Wall Street bailout plan, and the subsequent record drop in the stock market is but an opening salvo in the battle over the direction of the American economy. The bill's rejection by Congress was a major victory for free markets, but powerful proponents have vowed to ratchet up the pressure, tweak the bill, and bring it up for a vote later in the week.

The lobbyists backing the bailout can be seen all over Washington like circling sharks. Immediately after Treasury Secretary Henry Paulson asked for an astronomical $700 billion, men with slick hair and shiny suits poured into the city -- eager to get in on a piece of the action. The double-parked black cars in front of Pennsylvania Avenue's Capital Grille were thicker than the stacks of dry-aged steaks in the windows. With a bailout package so enormous, even tiny crumbs could be worth many millions for well-connected folks eager to turn in a favor.

Those favors are being turned in left-and right this week. A $700 billion bailout package would massively increase spending from a budget already gushing red ink. The federal budget deficit is running at $400 billion annually -- regularly piling new liabilities on top of last year's $9 trillion federal debt.

This budgetary hole doesn't count the Iraq and Afghan wars that put us another $114 billion into the red each year.¹ Then add in the bailouts from the past few months: $29 billion for Bear Sterns, an $85 billion loan for insurance giant AIG, up to $200 billion for Fannie Mae and Freddie Mac,² and $25 billion in loans for Detroit.³ In recent weeks, it has seemed that Washington's drunken sailors could actually suck the oceans dry.

The only opposition protest in sight was a small rally last Tuesday in front of the White House by Acorn -- a group seeking relief for distressed sub-prime mortgage holders. They weren't outraged about the bailout's cost or that it would reward the irresponsible. They just wanted the money to go to poor irresponsible people instead of rich irresponsible people. Translation: they wanted some of that money for themselves.

The key problem with the Paulson plan is that it is by, for, and about the insiders. As a former Goldman Sachs executive, Paulson has strong personal relationships those who would gain from the bailout, and lose from the failure of more Wall Street firms. This doesn't mean Paulson is seeking to profit from the plan himself -- it's just that he and his cronies have perspectives that are so skewed by their backgrounds as to cloud their thinking. It should be no surprise that economists and executives who worked on Wall Street are in favor of a massive government bailout of their own industry.

These people love to lecture Americans about the need to keep money flowing in business lending so the whole system doesn't seize up. Ordinary Americans who don't understand why a $700 billion bailout of Wall Street is the only way to accomplish this simply don't understand, they say. Americans must trust the more learned architects of the plan. But given the current state of Wall Street, Americans can be forgiven for not taking the word of former Wall Street executives.

Americans should oppose the Wall Street bailout -- not as an act of class warfare, but out of a sense of fiscal responsibility and healthy distrust of government and big business collusion. People who happen to be sympathetic to the free market should be even more opposed. Self-proclaimed capitalists can't just be fair-weather friends. If you believe in a magic hand that guides markets when they are climbing, you have to believe in it when they are tumbling, too.

To any purely objective observer, a market downturn is long overdue. The credit-based expansion of the American economy over the last decade was obviously unsustainable. Easy money fueled irresponsible consumer spending and a housing bubble as the savings rate plummeted to zero. The market prescription for these problems -- much higher interest rates, tight credit, bank failures, lower home values, and a bloodletting of companies with unsustainable business models -- is already underway. Market corrections are a cleansing phenomenon -- the death of crooked or rotten businesses creates fertile soil for new and productive businesses to grow.

Let there be no doubt: those who seek to stop it with any sort of bailout are only looking out for their own interests at the expense of the country as a whole. It is the long-term that presents the real risk of the Wall Street bailout, should it come to pass. It will put America even further into hock to China, Russia, Saudi Arabia and other despotic regimes and weaken the Dollar, all in the hopes that the borrowed money will bring stability to the system in the short-term. The stability, if it even comes, will come at the high price of exacerbating America's long-term structural problems that the government has refused to address for decades. Simply put, helping the economy in the short-term by harming it in the long run is no way to address America's problems.

Related Web Columns:

Stagnation's New Decade, September 16, 2008

Yawning Toward Disaster, September 2, 2008

Tyranny of the Irresponsible, March 18, 2008

House of Cards
The Collapse of Credit-Driven Spending, March 18, 2008

Victimized by an Idiotic Mob, October 2, 2007

Spending Away the Dollar, December 7, 2004

Notes:

1. CNN Money, Iraq War Could Cost Taxpayers $2.7 Trillion, June 12, 2008

2. Wall Street Journal, The Real Costs of the Bailouts, September 28, 2008

3. Fortune, Call it Payback, Not a Bailout, September 30, 2008