Why Government Guarantees are Bad

In today’s climate of bailout and stimulate, people are looking more and more to the government as the answer to our economic woes. This is tragic. The government isn’t the answer to our fiscal failings; for the most part, the government is the problem.

Let me give you a very small example of how the government’s good intentions are bad for us. I work in banking. My employer, while not untouched by the recent banking problems, has fared better than most. There is another bank in town, though, that really took it on the chin. This other bank had so many loan customers not making their payments that the bank was literally running out of money to operate. In a desperate attempt to raise cash, the bank started offering absurdly high rates on their CDs and Savings accounts.

Now, my bank, which has been making sound business decisions all along, pays the market rates on their deposit accounts. When this other bank started offering much higher rates, we had a rash of people rushing to move their money from my bank to the other. I wanted to keep my customers, of course, and also felt obliged to inform them of the situation of this other bank (without bad mouthing the other bank). When told of this other bank’s struggles, my customers didn’t seem bothered at all. Why so nonchalant? They knew their accounts were FDIC insured!

So here’s the reality – customers were moving their money from a sound bank and taking it to a struggling bank. They knew that if the struggling bank went under, the FDIC was there to cover their assets. There was reward without risk and the government guarantee actually encouraged the bad behavior.

That’s just one example of how good intentions backfire. The bailouts are another. If a company makes bad business decisions, it should spell doom for the business – it shouldn't mean we reward the company with a big fat check from Uncle Sam (AKA “taxpayers”). Companies that tetter at the brink after years of business as usual, are propped up (for a while) to continue business as usual.

Our leaders need to study up on basic economics. We’re supposed to have a free market based on a system of risk and reward. It’s turned into a semi-social enterprise that encourages bad decisions, rewards them with government bailouts, and follows up with “more oversight.