Re: A Letter to My Representative -- Pass it on to Yours

liberty student — Wed, 01 Oct 2008 21:30:46 GMT

Nice. Although you would be lucky to have a rep named "Doolittle". lol

A Letter to My Representative -- Pass it on to Yours

Kevin — Wed, 01 Oct 2008 21:03:26 GMT

Representative Doolittle,

Contrary to many of my fellow “capitalist” cohorts, I stand alone in rejecting the 700 billion dollar bailout. I am writing this to you for two reasons. First, to thank you for rejecting the bill. Second, on a more complex issue, I want to explain why I rejected the bill so you can better understand what your constituents are demanding of their representative.

Wall Street, a long considered icon of capitalism, is under the impression that further socializing our financial system is the answer to our problems. Over the last few weeks, I have been nothing less than disappointed in the events that have unfolded. Thus, this is the motivation behind my letter.

What I intend to do in the letter is threefold: (1) recap why Wall Street wants a bailout, (2) explain the fundamentals of all economic analysis, and (3) show why Wall Street is wrong. My goal is to keep things simple and comprehendible to a broad audience.

For simplicity, I will not touch on the subject of why we are in this disposition, but I’m sure your colleague Ron Paul has already tried to explain it to The House.

(1)

Wall Street wants the bailout for one fundamental reason, to create liquidity in the credit markets. Without liquidity, more companies like Lehman Brothers, Wachovia, Washington Mutual, and Bear Sterns will go under. In keeping things short, this is a problem for Wall Street because “banks lend money”, and without loans the economy will cripple on many levels.

What Wall Street is arguing is that the private sector cannot solve this problem. Why? Because no one wants to buy the “toxic” assets, and even if people did want to buy them there is not enough private capital to purchase all of the assets, at least at a price that will save the banks.

Aside from saving the banks, the bailout will build confidence in the market which will encouraging companies to lend their corporate assets once again.

It is because of these concerns that Wall Street is claiming that there must be government intervention.

(2)

While I am going to explain fundamental economic analysis, I am not going to put it in context of the current crisis quite yet. Other readers I will be sending this letter to will be jumping from their seats yelling at my words because “this time it is different”. I beg those twitchy people to hold back and wait for part (3).

The very foundation of all economic analysis is based in the reality of scarce resources. If resources were not scarce, economic analysis would not be in existence because all consumer demands would be met. What we know about scarce resource is that the consumer controls what resources and how much of a resource capitalists choose to produce. This is because suppliers are always trying to meet the demands of its customers. It is the relationship between the consumer and producer, the demander and the supplier, that makes capitalism work. It is through this system of the self-government of scarce resources in which prices form. Prices in the free market have meaning, they are a reflection of the actions of the demanders and the suppliers. Prices are the vortex that constrains the allocation of scarce resources to create an efficient economy.

(3)

From the simple lesson in economic analysis, my intention now is to systematically show Wall Street that they are incorrect in every regard to support the bailout. I will first show that the toxic assets can be purchased by the private sector. Wall Street will not like my answer for it will cause more financial institutions to fail, but I will follow up by showing why it may be necessary for banks continue to fail. Lastly, I will show why the economy would be hurt by the bailout.

It is ludicrous in every sense to think the toxic assets cannot be bought up without the aid of my tax dollars. The supply side of the equation is somewhat fixed at this point, so therefore, we need demand. Between domestic and foreign corporations, foreign government funds like that of Abu Dhabi and China, and private investors, if there is value in the toxic assets, there is the demand to purchase them. The problem right now is this, they are overvalued (the prospect of the government paying a premium for the assets is not aiding the current problem of overvaluation). If the companies were to sell the assets at a fair market value, investors would gobble them up. A simple conceptual supply and demand equation proves this. Why are companies not selling the assets at fair market value? Simple, aside from waiting for a government handout, it will force them to go under. Hence why many support the bailout.

Let me start this paragraph by making one thing clear, BANKS DO NOT LEND MONEY!!! Banks are mere intermediaries between savers and borrowers. If banks disappear, people will still want to save and borrowers will still want to borrow, hence there will still be a supply and demand for credit. The market is full of entrepreneurs trying to find ways to efficiently deliver to the demands of consumers, this situation is no exception. It is instinctual for people to fear the unknown, the bank has long been the intermediary, but is there another way to support these transactions? Honestly, I do not know, but if there is a more efficient way to transact the entrepreneur will find a way to deliver it. If the bank is the answer, only the most efficiently ran banks will remain because the market will force inefficient banks out of the market. This is a good thing because scare resources are being reallocated to work more efficiently to meet the demands of consumers.

On to the subject rebuilding confidence in the market so corporations will start lending their money again. The next paragraph will conclude that the economy is over leveraged. This would be good reason for a company to not want to extend credit.

I will not argue that keeping the economy choked off from liquidity will be a pretty sight in the near future, but I will argue the efficiency that will be created through the natural reallocation of resources will be great. I will further argue, that the use of 700 billion dollars of coerced resources, i.e. taxes, are not the answer to the current problem. Government, by its very definition is never a true creator of wealth. Through taxes, it can simply reallocate resources from point A (taxpayers) to point B. The action of wealth transfers via taxes undermines consumer preference and the very rock capitalism stands on, our freedom to use our scarce resources to our advantage. Forcing taxpayers to use resources against their will is the essence of socialism, the ultimate enemy to economic growth via price distortion. In this case, the wealth transfer would force our economy to extend credit that should not be extended, therefore the wealth transfer would further saturate the underlying problem, which one can logically conclude is an over leveraged economy. End of story.

All that I ask, in your search for an answer to this problem, is that you stand by your principals and remind The House of the fundamentals of economic analysis.

Sincerely,

Kevin M. Thelen

A Concerned Citizen

General

Re: A Letter to My Representative -- Pass it on to Yours

A Letter to My Representative -- Pass it on to Yours