How odd is it that the day the $700-billion Wall Street bailout package was voted down, only one stock trading on the entire NASDAQ hit a new high? With the financials getting hit the hardest, it was ironic that small regional bank Penns Woods Bancorp, Inc. (NASDAQ/PWOD) hit a new 52-week high on the first day of the meltdown.
I’m really leaning towards Jim Rogers’ view that the marketplace must be allowed to correct itself without intervention. A government bailout is just a double whammy that won’t correct a problem that the government is half responsible for in the first place.
If you were a government agency and you said to a for-profit financial institution that you would virtually guarantee all their lending, then what would that corporation go out and do? It would go out and lend money to almost anyone on the street who would fill out the required paperwork. Why worry? The government will be there to bail the whole thing out.
Fannie Mae and Freddie Mac got saved, but at an already enormous cost to taxpayers. And just think of what you would do if you were a financial institution on Wall Street with a bunch of unhealthy debt. You’d be saying to pass the $700-billion bailout at all costs. You wouldn’t be selling your unpaid mortgage debt at $0.20 on the dollar, because you would hold out for a government intervention. You’d also likely try to get the government to take on your other losses, and you certainly wouldn’t go for bankruptcy protection with the prospect of government help just around the corner.
The point that I’m getting at is that government bailouts do not correct the problem — they only mask it. A government bailout of bad mortgages does not allow the free market to correct itself.
I’m not saying that there isn’t a need for strong government oversight and regulation (particularly in the financial industry where money creation and leverage make the system work).
Jim Rogers called the bailout package the worst possible thing that the government could do, and added that policy makers are only acting to help out their own rich friends on Wall Street. He went on to say that Treasury Secretary Paulson takes calls from Wall Street executives on a regular basis and wondered if he would take your calls when you need help paying off your loans.