Capitalism Will Survive - Bailout or No Bailout

As the House prepares to reject the Troubled Asset Relief Program (otherwise known as the Paulson Bailout) it's worth reflecting on the fact that this is not the end of capitalism. Despite what you hear in the press, the failure of banks is part of the natural ebb and flow of capitalism. There are times that are good, and times that are bad. Times of excess are followed by pull-backs, in which the excess is removed from the system

There can be no doubt there was massive excess. Banks lent wildly, gorging on a feast of high yield, exotic debt instruments tied to ridiculous home valuations. I have friends who made high six figure salaries and they had trouble finding an affordable home in 2006. It was also true that all of my smartest friends wanted to become Wall Street bankers. That was where the action was, where the money flowed. In a couple of years, you could go to the Street and emerge a millionairre.

But it wasn't just the Street. Most of the best jobs were in the financial services space or tied to the financial space. Nearly every block became crowded with bank branches. How many bank branches do I need? Where I live there are two Bank of America branches literally across the street from each other.

Banks and finance took over the world and instead of becoming a means to an end - the financing and growth of companies - became an ends to themselves. Mortgages were no longer loans to help people purchase homes, they were assets that could be leveraged up to increase profitability and boost ROA, ROE, and line pockets.

The good times have ended.

There is no way to avoid the hangover.

Perhaps the rescue plan would have served as an aspirin, but the binge was so great that it's doubtful it would have much of an effect.

We must take the pain, fight through it, and realize that it will go away. The roots of capitalism are still strong. Some banks were smart enough not to join the party. They will begin lending. The other ones will disappear. The ones that are left will return to serving their customers and focus on what they are meant to do, finance other businesses, not themselves.

Some consumers were smart and squirreled their cash away. This cash will become highly valuable and they will be compensated for their foresight.

Many of the former winners will become losers and the people who looked like losers will emerge as the winners. At the moment, those that played the wrong card are crying the loudest but make no mistake, there are many who will do well.

In time, the hangover will fade and full health will return. We will remember the lesson that we learned, for a little while at least. And then, in ten, twenty, or thirty years time we will forget the pain and start the excess all over again.

That's capitalism.