Judge Jim Gray (Ret.) Superior Court of Orange County, California 2012 Libertarian Candidate for Vice President
The following is a fairly accurate representation of financial results when the government gets involved:
This is how it works:
Mary is the proprietor of a small neighborhood bar in Holyoke. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with a new marketing plan that allows her customers to drink now, but pay later. Mary keeps track of the drinks consumed in a ledger (thereby granting the customers’ loans).
Word gets around about Mary’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Mary’s bar. Soon she has the largest sales volume for any bar in town. By providing her customers freedom from immediate payment demands, Mary gets no resistance when, at regular intervals, she substantially increases her prices for her products. Consequently, Mary’s gross sales volume increases massively. A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Mary’s borrowing limit. He sees no reason for any undue concern since he has the debts of the unemployed alcoholics as collateral.
At the bank’s corporate headquarters, expert traders figure a way to make huge commissions and transform these customer loans into DRINK BONDS. These “securities” are then bundled and traded on international securities markets. Naive investors don’t really understand that the securities being sold to them as “AAA Secured Bonds” really are debts of unemployed alcoholics. Nevertheless, the bond prices continue to climb, and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.
One day, even though the bond prices still are climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Mary’s bar. He so informs Mary. Mary then demands payment from her patrons, but most being unemployed alcoholics, cannot pay back their drinking debts. Since Mary cannot fulfill her loan obligations, she is forced into bankruptcy. The bar closes and Mary’s 11 employees lose their jobs. Overnight, the DRINK BOND prices drop by 90%. The collapsed bond asset value destroys the bank’s liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.
The suppliers of Mary’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the DRINK BOND securities. But now they find they are faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations; her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.
Fortunately, though, the bank, the brokerage houses, and their respective executives are saved and bailed out by a multibillion-dollar no-strings attached cash infusion from the government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, nondrinkers who have never been in Mary’s bar. Aren’t government bailouts great? So let’s continue to apply them to programs like student loans, affordable housing, and many more. . .
Even worse: If you analyze what is happening, the government has been encouraging people like Mary from the very beginning to make financially dumb alcohol (homes) sales through numerous government programs designed to provide alcohol (homes) to those who can’t afford it. And with a promise —express or implied — that the government, not Mary, will carry the risk.
If you want a more complete analysis, please refer to Thomas E. Woods, Jr.’s Meltdown: A Free Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse (Regnery Publishing, 2009).
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