The Obama Administration is said to be in talks to Nationalize several large
U.S. Banks, or at least increase their stake in some of them (such as Citi).

We here at the Global Affairs Council have wondered with growing unease for some time at the Government’s intentions in this area.

Hopefully I don’t need to go into a discussion of why the Nationalization of banks is a terrible thing. We’ve commented in the past that the Government is not equipped to run a bank and would only make matters worse. Many government officials probably couldn’t even get an interview for an entry level job at a large bank, let alone run one.

Why, we wonder, doesn’t the Government simply create several new banks and loan all that money to them?

The old banks have failed, we should let them die.

The only reason we can’t do that is because of the risk of contagion and the further tightening of the credit markets due to fear of other banks collapsing.

But! If the government created several new banks (and by “created” I mean grant charters to independent private individuals not affiliated with the government in any way) and then loaned all those billions to them, there would be complete transparency. We, as investors, would KNOW that those new banks don’t have any toxic assets that could potentially wipe them out.

That would completely remove the fear that would have lead to contagion.

Investors would feel comfortable investing in these safe new banks, businesses would feel safe conducting business with these safe new banks, and the public would feel comfortable keeping their savings in these safe new banks.

The major banks have failed. Criminally failed. Banking is an incredibly easy business. You take in deposits, you save a percentage of those deposits and loan the remaining amount out, and your profits are the difference between the interest rate that you pay the depositors and the interest rate you charge the people whom you make loans to. Easy.

The fact that these major banks have screwed up something that is so fundamentally easy is all the proof we need that they should be allowed to fail. Remember the old view of the stodgy banker closing shop at three in the afternoon and playing lots of golf? There’s a reason that stereotype used to exist…because banking is a sleepy, easy profession.

Let’s stop trying to rescue banks that can’t be rescued, and SHOULDN’T be rescued. Lets let some new blood into the system and put this madness behind us.

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There was a great article today in the Financial Times by P.J. O’Rourke titled “Adam Smith’s Last Laugh”

I urge everyone to read it. It discusses the fact that nothing in this current recession is new. Adam Smith expected and described this exact course of events hundreds of years ago, and explained the exact way to deal with it.

What was Adam Smith’s prescription for saving the day?

Do nothing.

In a capitalist system, when things become overpriced (think BUBBLE), the market reacts to drive prices back down.

We are seeing this today. House prices got too high, now they’re dropping faster than you can say the words “misconceived stimulus package”.

This drop in home prices is painful for homeowners. Tough luck. You shouldn’t have bought a house you can’t afford. It’s not the government’s job, according to Adam Smith, to help you out of that mess.

“But”…you say…”people will lose their homes, and we just can’t let that happen!!”

Of course we can. The people that lose their homes will just have to…*gasp*….rent.

Throughout history we’ve seen crises upon crisis just as bad or worse than this one. Think Tulip Mania. In each case, the only thing to be done was to let it work itself out and NOT let the government muck it up. Or as O’Rourke quotes Adam Smith as saying “I have never known much good done by those who affect to trade for the public good. “.

We couldn’t have said it better ourselves…

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Recessions are a good thing.

I’ll say that again; Recessions are a good thing.

President Obama wants to end the recession quickly. But American President’s don’t get to make that decision, that’s the whole point to a recession. And you wouldn’t want them to if they could.

You see, a recession tells you what you’re doing well, and it tells you what you’re doing poorly. It shakes out corruption and inefficiency, gets rid of poor segments of the economy and strengthens good segments.

It forces you to change your behavior when you don’t want to, and even when you kick and scream against it (as President Obama is doing right now).

It’s why America is Great, and it’s why Communism historically fails. The Communists didn’t have the benefit of recessions to tell them what they were doing well and what they were doing poorly, so poor segments of the economy continued to grow until the weight of their mismanagement and inefficiency caused the entire system to collapse. Did you think Communism failed because Reagan told Gorbachev to “Tear down that Wall?”; no.

That’s the fundamental difference between a Capitalist system like ours and a Command system like Communism. Recessions, and Government intervention (like the kind proposed by President Obama).

Believe me, you don’t want President Obama to meddle with the economy. It will sort itself out on its own, far better than he could ever hope to do himself. Think Post Office, think DMV, think any other government program you’ve ever run across. They’re simply not equipped to act rationally or competently in the economic sphere.

That’s the secret. Ask an economist. They’ll tell you that Government intervention will kick us out of a recession quicker than if you did nothing and let it sort itself out on its own. BUT, the problem is that in the long run, Government intervention leaves us less well off in terms of FUTURE growth than if you had left it alone and let it sort itself out.

Even a Keynesian will agree with that statement.

Think of a scale from one to ten, with one being bad and ten being good. If you leave the recession alone, our economy will be at an 8 five to ten years from now. If you intervene (aka President Obama’s stimulus plan), you’ll kick start the economy today, but five to ten years from now we’ll be at a 4.

That’s why Government leaders like President Obama want to intervene. It looks good TODAY, and they don’t care what happens 5-10 years from now because they’ll be out of office then.

American’s need to wake up. If you think your problems will all be magically solved by any one person, even if that one person is as charismatic and talented as President Obama; then you seriously misunderstand the world in which you live.

Work hard and save, pay down your credit cards, go back to school if necessary. You may have to become a 3-car family instead of a 5-car family. But believe me, recessions are nothing new, they’re nothing to get scared about, and they won’t stop occurring.

But then, we wouldn’t want them to…

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