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I’m surprised there has not yet been a run on my bank.  The way that Bush, Paulson and Congressional Leaders are reacting to the liquidity angst on Wall Street would make you think there’s no money left, and we only have days or perhaps hours to get our money safely out of the hands of our bankers.

Of course, nothing could be further from the truth.

But wrapped up in that fear is some of the reality that our economy is dependent upon the use of credit throughout the business and consumer world to keep things moving.

When you think about it, that sounds a little more scary than I thought it would.

In other words, if we all had plenty of cash, could easily leverage existing personal liquidity to acquire the things we need and perhaps even satisfy our wants, and had no credit to use, that would potentially be a big problem.

Because growth often depends upon the ability to leverage credit to invest in start-up costs, expansion costs, raw materials, etc.  Which is a great model for the world of business.  It’s really about investment more than credit.  Meaning, you expect there to be risk of failure.

In the consumer world, the game is different, credit is seldom used to facilitate growth (except for real estate), and more often is used to create a lifestyle that the borrower may or may not be ready for from an income standpoint.  And over the years, retail business has become more and more dependent upon credit to keep Americans feeding their greed for more “stuff” to build those lifestyles.  Truly, if consumers don’t have or want to use credit, the retail world is in risk of decline from the heady growth it’s experienced for the past few decades.

And that was why Congress and Bush introduced the Economic Stimulus Package earlier in 2008, to get consumers buying things even though credit was becoming less desirable to consumer.

And as we walk into this week with an additional $700 billion bailout of the financial industry (on top of the $800 billion we’ve already spent), one wonders if we’re really doing the right thing.

Imagine a family already in over their heads, already heavily in debt, already outspending their income, maxed out on their credit cards, piles of medical bills on the table, looking for a way out.  Now Wall Street is in this boat.

And we’re ready to offer them a way out.  And make the taxpayers, many of whom have been responsible enough not to get themselves into this kind of trouble over the years, liable for the bailout.  Don’t be fooled… buying bad debt is not going to lead to a major recovery of the bailout money… we know the debts are bad, they’re not going to suddenly become good.

And, frankly, everyone involved in the bailout probably has a strong conflict of interest.  Lovely.

I’m not saying it’s wrong (yet), but I don’t like it.  Of course, there are alternatives I like even less… like a foriegn interest providing a bailout.
Newt Gingrich expressed concerns about this today at National Review Online.  He is concerned that this is going to get rushed through Congress too quickly, and identified four questions that really should be answered before this proceeds:

  1. Is the current financial crisis the only crisis affecting the economy?
  2. Is a big bureaucracy solution the only answer?
  3. Will the Paulson plan be implemented with transparency and oversight?
  4. In two months we will have an election and then there will be a new administration. Is this plan something we want to trust to a post-Paulson Treasury?

Good quesitons these.  Hopefully, we can get them answered and resolve the current crisis with solid knowledge, planning, and common sense.

I will continue to assert that the basics of market discipline should be allowed to work (which will naturally hit my 401K just like yours), and we continue to abandon that thinking as large companies face failures, often from their own poor management and decision-making, in a world where the average investor is constantly reminded that investments involve risk, and that one may lose some or all of the money they invest.

Why in the world is that not good enough for the big boys?

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