Government Made the Mess

The bottom line is that socialism, even for rich and so called "smart" people, does not work. If socialism did work, we wouldn't need a market at all. We could just have really "smart" people tell us what to do, what to think, and what to pay for everything. Somehow Wall Street and Washington insiders believe that they can ignore this very basic concept and get away with it. Their arrogance and ignorance of basic economics seems to me a lot like the way Wile E. Coyote thinks he fly for a while after he runs off a cliff chasing the Road Runner.

I am sure that Paulson, Bernanke and other promoters of these rescue plans mean well. They believe that we need these extreme measures right now to avoid a meltdown, so I understand their position. But their plans will not stop a meltdown if the problems are really as bad they seem. Further, meltdowns, as painful as they are, are a necessary part of capitalism. They do not cause depressions. Depressions are caused by governments that prevent the market from correcting itself and therefore choke off economic activity. This is what happened during the 1930s in America. It was onerous regulation, tax hikes and the New Deal that prolonged the downturn. We are in this mess right now because of government meddling by Alan Greenspan, who kept interest rates artificially low for too long and inflated the credit bubble.

What would work to correct the financial system? First of all, we should emphasize transparency at all of these banks and other lenders. That means wiping out the equity, unsecured debt and senior management pay packages at insolvent companies. The government could then facilitate the absorption of this failed enterprise into a better capitalized and managed company such as JPMorgan Chase (JPM Quote) or Wells Fargo(WFC Quote). Or, the government could provide new equity for the recapitalization of those companies and also replace management in those situations with more competent executives. This restructured entity would then have a recapitalized balance sheet and a new management team that would have some credibility with investors and market players.