The Taxpayer Gets Hosed in Bail-Outs… And an Alternative

In comments, reader Gordon links to this story:

Fear that a hobbled banking sector may set off another Great Depression could force the U.S. government and Federal Reserve to take the unprecedented step of buying a broad range of assets, including stocks, according to one of the most bearish market analysts.

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Legal changes would be needed to give the Federal Reserve and the U.S. government the authority to buy stocks. Currently the Federal Reserve can buy only debt issued by the Treasury, as well as U.S. agency debentures and mortgage-backed securities.

I, frankly, oppose any bail-out. A small mom and pop business in the same position would get no help at all. Why taxpayer money then go to helping a company that is then going to turn around and pay all sorts of benefits to this guy until the day he dies, especially given since that dude is one of the people who got his company into the mess in the first place. But we all know the bail out is going to happen. A guy worth $900 million shouldn’t be forced to pay for his own country club membership or health insurance. This is America, after all.

But here’s a question… if the government is going to pony up huge sums as in the S&L bailout, put itself on the line with massive loan guarantees as in the Chrysler bail-out, or if the prestige of the Federal Reserve will be brought to bear as with the Long Term Capital Management mess, all of which will benefit the shareholders of the banks and all of which will costs us, the taxpayer something, why shouldn’t the taxpayer get something for it? Seriously. What are we, chumps?

And here’s what this taxpayer thinks we should get: equity. The government can sit on that equity or put it in a trust or whatever. Five years later, when prices go up (none of that Resolution Trust Corporation nonsense), it can sell. The proceeds can be used to cut debt or in lieu of taxes or whatever else. And if the company doesn’t like having a big chunk of its equity in the government’s hands, then they can either provide some sort of equivalent collateral or do without. Anything else and, once again, the taxpayer will be the sucker.