Why We Should Let The Banks Fail

by John Hawkins | March 9, 2009 6:08 am

One of the false premises that undergirds much of the Democratic Party’s behavior since Obama got into office is that through brilliant, decisive action, the geniuses up on Capitol Hill can blunt the impact of a recession.

Hence, we have crooks like Chris Dodd — the man on Capitol Hill who’s most personally responsible for the mortgage crisis, Barney Frank — tax cheat Tim Geithner, and the guy who is already the single most incompetent President in American history, Barack Obama, getting together to meddle with the economy. Of course, George Bush deserves his fair share of the blame as well for getting this whole process started with TARP, but Obama & Company have happily skated down the slippery slope that Bush prepared.

We now have the government deciding which banks are going to be allowed to keep their doors open and which banks will be allowed to fail — along with what those banks can pay executives, what bonuses they’re allowed to give out, what kind of planes the execs are allowed to fly on, how they’re allowed to treat their customers, and what resorts they can visit.

We also have Congress spending billions to keep the unions in Detroit afloat, oops, did I say the unions? Technically, they’re keeping the Big 3 afloat.

Then there are the people who aren’t paying their mortgages. The government or more accurately, the taxpayers, because that’s where the government gets all of its money, are bailing out people who’ve gotten behind on their mortgage payments.

Why do these things? Because, the reasoning goes, the geniuses in Washington are so brilliant, so far ahead of the curve, that they can determine what’s best for the economy. However, if you look back at the recent performance of Congress, there’s nothing that should give anyone confidence in their judgment during situations like this.

As a matter of fact, the entire banking crisis was caused by Congress bending banks over a barrel and forcing them to give out loans to people who were bad risks. Then, remember what they were telling us about the first TARP? Push this through and it will fix our problems with the banks. Not only did it fail to get the job done, but they’re already talking about a TARP 2. What about the stimulus package? Oh, it was going to get the economy moving for sure! But, now even Obama is admitting that the economy may not recover this year and there is already some talk of a 2nd stimulus package. In other words, we’ve gone trillions of dollars into debt and there is no evidence that anything Congress has done has helped at all.

……Which brings us to the comments of Richard Shelby and John McCain this week-end[1],

John McCain and Richard C. Shelby, two high-profile Republican senators, said on Sunday that the government should allow a number of the biggest American banks to fail.

While the Alabama senator did not say which banks to shutter, he suggested that Citigroup might be on that list, saying the bank has “always been a problem child.”

Mr. McCain, appearing on “Fox News Sunday,” echoed that sentiment without identifying any banks. Mr. McCain, who lost the presidential election last November, also accused the Treasury Department of avoiding the “hard decision” to let “these banks fail.”

Ironically, given that the netroots was almost as fiercely opposed to the original TARP as the rightroots, the idea of letting banks fail has produced endless hand wringing on the left side of the blogosphere.

However, there are three things people should keep in mind.

#1) Recessions are painful. People lose jobs. Businesses fail. It’s not a pleasant experience any way you slice it — and there is precious little evidence that the government is capable of ultimately making the experience less jarring by choosing which businesses live and die. I don’t want to see the Big 3 fail or see Citibank go under. But, if our choice is between keeping those institutions on life support with infusions of taxpayer money or pulling the plug, I say “pull the plug.”

#2) The expense of bailing out these banks and businesses is stupendous. We’re on pace to run the biggest deficits since WW2 and we’re likely to be over a trillion dollars per year in the hole throughout Barack Obama’s first term — if not much longer. It’s entirely possible that the long-term damage done by the deficit spending we’re doing now will be FAR worse than letting these businesses fail.

#3) The government’s tinkering in the marketplace often has extremely negative consequences. It’s why the Great Depression went on for so long and it has played a significant role in tanking the stock market since Obama got into office. The more involved the government gets in the economy, the more wealth we are likely to see destroyed.

So, yes, we should let the banks fail. We should let the Big 3 head to Chapter 11. We should let foreclosures go forward. Will people get hurt? Yes. Will it be pleasant? No. But, is it likely to produce a better outcome than allowing D.C. to micromanage our economy? History definitively says, “yes.”

  1. comments of Richard Shelby and John McCain this week-end: http://www.nytimes.com/2009/03/09/us/politics/09talkshows.html?_r=1&partner=rss&emc=rss&pagewanted=all

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