The Bailout of American Banks
The Bailout of American Banks
At the time of this writing, an event took place which stirred up an immediate storm of activity; this event was the announcement that both Bank of America and Citigroup, two of the most seriously damaged United States banks would in fact be posting profits after receiving government bailout funds earlier, as they teetered on the brink of bankruptcy themselves. This news led to a knee-jerk reaction from elected officials, bank executives, the mainstream media and others, all singing the praises of bank bailouts and claiming that these banks were able to “recover” due to the stimulus money doled out to them by the government. However, there was no conclusive evidence to prove that the two events-bailout and bank recovery-were in fact related. As a matter of fact, there is compelling evidence to show that the bailouts in fact do not, did not, and will not be effective in saving ailing US banks.
Ultimately, this research will show that the banks should not have been bailed out by the American government because of one simple fact-the bailouts, by and large, have not helped the banks to recover from their massive problems. This argument will be
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Bank-A Relative Term
To begin, it is possible to point out flaws in the government bank bailout program based on the very name of the program itself, for many of the organizations that are lining up for monetary help, claiming in fact to be banks, are in reality not banks at all, but are more similar to the traditional “shell corporation” that has been used by conmen for decades in an effort to take advantage of the general public, who often deposits their money in an institution which they assume to be a conventional, legitimate bank simply because the organization has an official sounding name and by all appearances seems to be an actual bank. The roots of such corrupt organizations in the modern era so to speak can be found in the savings and loan disasters of the 1980s and early 1990s, when America saw dozens of so-called banks disappearing overnight due to a lack of funds on deposit, dishonest executives and the like. Along with these false banks, billions of dollars of depositors’ money disappeared as well, many times into offshore bank accounts when the imposter bank executives literally took the money and ran (Dymski, et al). Today, in many cases, illegitimate organizations, somehow passing themselves off as banks, are able to receive their share of the trillions of dollars that the government is pouring out in the effort to attempt to revive the banking industry with the stroke of a pen.
When organizations that are not actually banks are able somehow to qualify for federal bailout money, this not only shows that there is something wrong with the system being used to pass out the bailout money, but also perhaps that the bailout money itself should never be given out in the first place. As will soon be seen however, illegitimate as well as legitimate banks are in many cases basically wasting the money they have been given in the bailout.
Fraud and the Bailout Program
Having made the point that many fraudulent banks are collecting bailout money which points out serious problems in the use of bailouts as economic stimulus, it is also possible to show evidence which indicates that bailouts will not help even the legitimate bank that receives the help because many of the bailout actions are based in fraud.
Understanding how fraud can infect even the legitimate banks that are involved in the bailout process, and how overall the bailout of banks does no good in the final analysis requires and understanding of the nature of many of the assets that the US government is buying out from the banks, falsely believing that this will somehow help these banks to recover, and along with them, the entire US economy as well. One can hardly listen to any news broadcast about the bailouts without hearing the term “toxic assets” to refer to bad mortgage loans and other financial products which were essentially created out of thin air and literally are not worth the paper on which they are printed. Given the nature of these essentially worthless assets, if and when the government purchases these assets from banks in order to give the banks some relief and try to resuscitate them, everyone seems to lose focus of one important fact- the worthless assets, when bought by the government, do not provide any value to the government when purchased, so basically, the government is throwing away money by dumping it on terminally ill banks (Goodway). As if this was not bad enough, a particularly chilling scenario also opens up with this arrangement- there is almost nothing in place to prevent banks from creating additional, false toxic assets at the last minute and forcing them on government protectors. If the banks know that these bad investments will be redeemed by the government, there would seem to be no limit to what the banks will do in order to sell these assets to the government for a quick source of cash, thereby distracting them from what they should in fact be doing, which is the conducting of profitable, legitimate business.
Bailouts Have Not Equaled More for the Average Consumer
At the heart of the government bailouts is the claim by the government that the bailouts will return banks to the ability to loan money to the average American, which would play a key role in breathing life back into the sickly American economy. The reality has proven to be vastly different however; at present, there are still countless accounts of individuals and businesses not being able to get the loans that they need to move forward despite the economic storms that have been brewing lately. Of course, as was mentioned earlier, if money is not available to the individuals and businesses, they cannot spend any money, which of course contributes to a lack of economic activity in a time when businesses, from the largest to the smallest, are virtually begging for customers to do business with them (Grey). While there does not seem to be any way to drive these banks to make money available to others, there does not seem to be any reason for the government to provide money to them either.
Other Misuses of Bailout Money
If the bailout money is not being used by the banks to help consumers as they were supposed to, the question begs as to what the money is being used for, because the misuse of the bailout money is another reason why it should not be provided in the first place. Over the first several months of 2009, there was a flurry of acquisitions of financial institutions by other institutions without any compelling reason for these transactions to take place. Whatever the case, these deals show that the banks really do not have a plan in terms of how to properly use the bailout money being provided to them, much like spoiled children with too much allowance money provided to them (Hudson). This misuse speaks as much to the flaws to be found in the banking system of America as it does about the government entities that are handing out money to the banks. What is seen here is the worst of both possible worlds, which proves that in fact bailout money is handed out incorrectly and should not be handed out at all in the first place.
The Stock Markets and the Bailout
A recurring theme in the bailouts is the claim that through bailing out the banks, the entire American economy will be brought back on its collective feet; one of the ways that this is claimed is that strong banks will restore the foundations of the financial markets and inspire investment in the stock market as well. However, this also has not proven to be the case, and in fact, the opposite applies. Both of the major American stock markets- AMEX and NASDAQ –have failed to react positively to the money being given to American banks. Research actually indicates that investors are actually highly suspicious of positive results posted by American banks in the present day because of the overwhelming fear that profitability is not a result of solid business, but as the result of artificial income that comes from government bailout money (Cox).
It also seems logical that in the future, any positive earnings information will be viewed skeptically by the stock markets, as long as bailout money is being handed out to banks, for the banks can essentially claim profits which are in fact monies that came from government coffers. Overall, it would make sense that the only way to restore confidence in banking would be for the banks to have to succeed, or fail, on their own.
The World View of American Bank Bailouts
An often overlooked angle of the American bank bailout crisis is the reaction of foreign investors and banks to the fact that American banks will only return to their previous bad ways after receiving bailout money. Just as the American investor needs solid proof of profitability and sustainability before they will invest in domestic companies, those investors who are from other parts of the world have expressed their hesitance to invest in America as well as their skepticism regarding the bailout overall. Especially compelling is the outspoken nature of Swedish banking officials; long regarded as one of the most respected banking capitols of the world, Switzerland boasts some of the sharpest financial minds on the planet, and these individuals are also repeating that the bailout of American banks will not have any long-term positive effect, and may in fact have the opposite effect in the long run (Lynch).
What about the Free Market?
Having laid out many tangible reasons why the bank bailouts will only return the banks to their previous, poor condition, there is also a less tangible, but very important additional reason to consider- the free market element of the American economy, for without the free market element of the economy, nothing else would seem to matter. At the very heart of capitalism, and indeed a critical ingredient which makes capitalism work is market freedom- the freedom for people or corporations to invest their money in a business venture in the reasonable expectation of a profit for their efforts, as well as the freedom of individuals to do business with a given organization, or not to do business with them. Applying this model to the American banking system, it makes perfect sense to allow banks to compete with each other and to be established by those who are willing to take the risk to make the banks successful. Likewise, if the banks do not provide the products and services that customers desire, or the banks are not properly managed, those banks should in fact be allowed to fail through an economic version of natural selection. When the government interferes in that process by inflating the banking community with money that comes from nowhere, there is no incentive for bank management to do a better job of running their banks, serving the best interests of their customers, or to follow the conventional banking regulations (Gutman). As such, what opens up is a banking system with no accountability or incentive to succeed, both of which violate the most basic rules of any free economy. No amount of government money should be allowed to do that.
As we have seen in this research, the government bailout of banks cannot and does not work for a variety of reasons, and those banks that receive bailout money will eventually only go back to their previous ways. Therefore, in conclusion, what every American should do is make every effort to speak out against bailouts, before it is too late.
Cox, Jeff. “Five Reasons the Markets Don’t Like the Bank Bailout”. Retrieved July 13, 2009 from the World Wide Web: www.cnbc.com/id/29121916.htm.
Dymski, Gary A., Gerald Epstein, and Robert Pollin, eds. Transforming the U.S. Financial System: Equity and Efficiency for the 21st Century. Armonk, NY: M.E. Sharpe, 1993.
Goodway, Nick. “America’s Plan is Open to Fraud”. Retrieved July 15, 2009 from the World Wide Web: www.thisislondon.co.uk/standard-business/article-23678446-details/US+bank+bailout.htm
Grey, Barry. “The Dirty Little Secret of the US Bank Bailout”. Retrieved July 15, 2009 from the World Wide Web: www.infoclearinghouse.info/article21116.htm.
Gutman, Huck. “Failed Banks, Bailouts and Federal Policy.” Monthly Review Mar. 1992: 29+.
Hudson, Phil. “4 Reasons Why the Bank Bailout Will Probably NOT Work”. Retrieved July 15, 2009 from the World Wide Web: www.philforhumanity.com/2009_Bank_Bailout.htm.
Lynch, David. “Swedish Bank Rescue Expert Doubts US Efforts Will Work”. Retrieved July 13, 2009 from the World Wide Web: http://usatoday.com/money/economy/2009-04-29-swedish-bank-expert-us-efforts.htm.