That damn bailout...

The Bush-Paulson bailout, even after being rejected on Monday, successfully went through the House of Representatives on Friday, meaning that American taxpayers will now be an extra US$700,000,000,000 out of pocket (and now have over $10,000,000,000,000 of debt to pay off). The money will be going to try to prop up a flawed financial system, and to delay and magnify further economic collapse.

Over the past few weeks, you undoubtedly would have been hearing, from all political groups and figures, from Sarah Palin to Winston Peters that this collapse has been caused by "greed", capitalism and spectators. Similarly, no one actually tackles the proper root of the problem (artificial credit expansion) and instead advertise great new systems of regulation and government interference. In other words, more power to politicians.

However, in a free market, banks only have so much money to lend out (and if bank prints their own money such as in America pre-civil war, it can quickly become worthless), and are accountable to the people who deposit their money in the bank. Low interest rates signal that people are more willing to take risks for business expansion and economic growth, and that the bank has a lot of money to lend out. High interest rates mean that people want to be more conservative with their money.

Under a free market, interest rates set by banks go up with inflation (as the money gets devalued with time). However, in today's mixed economy, governments set official interest rates. And as thus, they also set inflation at a steady pace, to ensure there's always money on hand to lend out, to ensure economic growth (which is what we've seen during these two decades, with the dot-com bust as an interval).

Unfortunately, this artificial economic growth does not encourage proper, responsible investment, and this can be seen in middle-class America -and New Zealand- with the rise of the McMansion (although many regulatory policies are involved there). The building and buying of McMansions is generally hard work, but, from hearing stories about loans worth hundreds of thousands of dollars with 0% deposits, it's happening alright.

The inevitable result of stupid business decisions is business failures, job losses, and share market crashes, such as we've seen with Lehman Brothers, AIG, Fannie Mae & Freddie Mac, and many New Zealand finance companies. What this current collapse signals is a market correction, caused by governmental inflation. Also to consider, is the fact that money gets devalued by inflation, which is a double-whammy for everybody.