Now that we are committed to pay, how do we pay for it all?
There is no doubt that the current situation is akin to a global financial tsunami. As more countries have opted to bail out their financial systems, the U.S. had no choice but to follow suit.
When Ireland first insured all of the deposits in its banking system, the rest of Europe — despite the initial opposition — had no other choice but to follow suit. Failure to do so would have sucked deposits away from European — and possibly even U.S. — banks into Irish ones.
And so it was for the United States. The bailout was not the optimum solution because of the moral hazard issues that are involved in it, not to mention the serious precedent that we have created. Would large banks be expecting the same rescue in the future? Do they have an incentive to run a tight ship so to speak if they know that Uncle Sam — read we the taxpayers — will be there for them?
That is the risk that we have assumed. However, when Treasury Secretary Paulson called the major banks for a meeting in Washington, D.C., it is worth noting that one bank said no to the help. Wells Fargo actually turned down the new capital, arguing it did not need it.
The Treasury warned the bank that if it declined now, don’t come back later if it ran into problems.
Bullied or not, Wells Fargo signed on the dotted line with the others.
It is nice to know that some banks stood their ground on principle.
The question now is how do we exit out of this mess? This is not the first time that the U.S. government decided to own part of the banking system. But in past experiences, we managed to return those assets to private hands.
Now we are looking at borrowing requirements that approach $1 trillion and possibly more. It is not clear that anyone has figured out a way to pay for all this.
Issuing more debt will have to do for now, but has anyone figured out where the money will come from? Taxes? Never — unless politicians wish to commit political suicide. A reduction in spending? Not likely.
So it looks as if we are headed for a borrow-now-and-pay-later scenario — something that does not quite get the root cause of the problem but something we seem to be good at despite our lectures to the world not to do it.
