On Tuesday 2/24/09, I stated my belief that the government will act as an economic nanny. No large firm will be forced into a painful restructuring, much less fail. Now today we hear that AIG may get a government backstop for its CDO exposure. That's right boys and girls, if AIG's CDO bets continue to sour, the government may take the hit. I warned you.
Some of my readers and contacts took that as good news. Maybe I'm old fashioned, but I don't want my tax money to pay for bad bets of others. I am not suggesting that large firms fail and take depositors or insurance customers with them, but shareholders, who are the owners, should be wiped out as a result. The wonton bailing out of corporations sends a poor message to corporations and sets a dangerous precedent. That is, if we continue to be a capitalist nation.
Besides a Trotsky-an redistribution of the wealth, President Obama's new agenda calls for an end to government subsidy to mortgage lenders. This sent the price of SLM bonds and shares tumbling. It is also bad news for Citi, which is a large student lender. The administration acknowledged that the goal is to make the government the primary student lender. I can't wait to see the lending criteria of such an arrangement. Could we see low-income borrower receive low interest rates while more creditworthy borrowers receive higher interest rates? Why not? This is the government at work. Maybe we will have government runs automakers build government-mandated vehicles with consumers purchasing with government loans. With GM having reported a $30B annual loss for 2008 and begging for billions of dollars or more aid, anything is possible.
The next time you cheer a government bailout of a company, consider the consequences. It will be a long, long lonely recession
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