Adam+Smith

**ADAM SMITH AND THE BANKING BAILOUT:** media type="file" key="Bailout Song (Trillion Dollar Economy Songs- Ron Paul- Peter Schiff- Jim Rogers).mp3" width="240" height="20"


 * How would Adam Smith respond to the US government bailout of the banking industry? Why? Would the economic thinker approve? Disapprove? Alter the bailout? Be specific with both your answer and your reasoning.**


 * Thesis:** Adam Smith would consider the Bank Bailout of 2008 necessary because it will promote competition in the long run. Smith would argue that by helping out the failing banks, the government would be keeping more competitors in the market, thus encouraging competition and allowing the market to flourish. However, to some extent, keeping weak competitors in the banking industry hurts the consumer, and in turn, the market. Furthermore, if Smith could alter the conditions of the bailout, he would restrict unnecessary employee spending (like huge executive bonuses) and promote responsible reinvestment back into the company. He would also issue permanent regulations to continue these good practices so no further bailouts are necessary.

In 2008, President Barack Obama put into place a $700 Billion program called TARP (Troubled Asset Relief Program). This program was used to buy mortgage-backed securities that were in danger of defaulting. By removing these troubled assets from the marketplace, TARP was designed to stabilize our economy and get us back on the right track. Some people were concerned with this plan before it was actually executed, and when a lot of the money was mis-allocated and used to fund multi-million dollar bonuses for company’s top CEOs, people were outraged. According to the JFK Federal Budget Simulation, our government is already running a deficit because we spend more money than we actually have when we plan the national budget. Back in the 1980’s and 1990’s our government spent a total of about $160.1 billion to bail out a total of 747 failed savings and loan associations. Over the course of 3 decades, our government has had to bail out banks twice. Smith would not approve of too many bailouts. If the government has to bail out a bank or company multiple times, that's indicative of a few things. First off, one might go so far as to say a company that has needed bailouts every decade or so probably isn't going to improve its operations drastically with the next bailout. In fact, because the employees of that company see all the money they're getting from the government, they could even work //less// hard because they have less of an incentive to work hard. Also, bailouts cost a lot of money, and there's no reason to repeat something that doesn't work. Therefore, Adam Smith would alter this bailout in a few ways to insure the banking industry will not need any further bailouts.
 * __What actually happened in the bailout?__**

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**__What are Adam Smiths beliefs?__ **  Adam Smith’s four laws, the law of self-interest, law of competition, law of accumulation, and law of population, all support why he would promote and agree with the bank bailout. Although he believed in a Laissez Faire economic policy, which means "let alone", he would allow the banking industry to be rescued by the White House. Smith believed that the government should only interfere within the market as long as it promotes competition, which it does in this case. His first law, the law of self-interest, states that by consuming selfishly, you support and allow the market to grow and flourish. The main idea of Adam Smith's law of competition is that if a certain game (or market) has more players in it, the tougher the competition will be. This applies to the banking industry because keeping banks in the market creates the tough competition that Adam Smith thought a thriving market should have. Smith's third law, the law of accumulation, refers to the accumulation of profits, and success in general. In terms of his law of population, the more banks that are in business, the more job opportunities there are. Adam smith believed that if the working man was being paid more, there would be more men available to work. If people have a job and the money to spend, they can buy things and "vote with their wallets" and our country wouldn't be in the amount of debt that we're in.

**__Smith's //Theory of Moral Sentiments//:__** Adam Smith's //Theory of Moral Sentiments//, which he published in 1759, shows sentiments both in favor of the bailout and against it. On one hand, he wrote:

//"... In spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose ... be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society." This quote would support the bailout because it could be said that the bailout was a necessary "distribution of wealth" that just came at a time when the market was way worse, and, as a result, cost much more than the normal distribution of wealth. However, Smith also wrote: //

//"// //Nature has directed us to the greater part of these by original and immediate instincts. Hunger, thirst, the passion which unites the two sexes, and the dread of pain, prompt us to apply those means for their own sakes, and without any consideration of their tendency to those beneficent ends which the great Director of nature intended to produce by them."//

//This quote basically reiterates Smith's main idea: the economy is controlled by "invisible" forces, and Nature is the right solution to any economic problem. If there is a free market, there is a self-correcting market. This would cause Smith to disagree with the bailout of 2008 to some extent. //

Looking at the article //What's Your Consumption Factor?//, we can easily realize that Americans consume and spend a lot more than most people in the rest of the world need and have. The banking industry has allowed for this to go on for so long, giving loan after loan to Americans. Because the banks are loaning out so much money, they are the ones that are in debt and need the bailout. Adam Smith would argue that the bailout would not only help the banking industry by lifting it back on its feet after such failure, but would also increase the competition within that industry. Although it was the weaker competitors that failed and needed to be bailed out, every seller counts, and the more sellers in the market, the more the market thrives. However, for Smith to agree with such a bailout, there would have to be set conditions in order to prevent any future bailouts. Smith may have believed in Laissezz Faire; however, if the bailout truly did increase competition in the market, and was designed in a way to help prevent future economic crises, he would definitely support Obama and the banking bailout of 2008.
 * __Why Adam Smith would back Obama:__**

-Report from the Office of the Special Inspector General for the Troubled Asset Relief Program
 * __The Other Side:__**
 * //"To the extent that institutions were previously incentived to take reckless risks through a 'heads I win, tails the government will bail me out' mentality, the market is more convinced than ever that the government will step in as necessary to save systemically significant institutions,"// **

This quote shows how bailouts like the bank bailout of 2008 could decrease competition rather than increase it. In a free market, only the businesses that can survive, do. Banks and businesses have an incentive to perform well to stay afloat, but when the government bails out failing businesses left and right, it gives companies less incentive to try and do well because they have the knowledge that if they do fail, it isn't the end of their operation. Think about it: when there's economic turmoil and the government declares your company "too big to fail", wouldn't you be relieved?

In order to satisfy Smith, the government would have to set permanent regulations on the banking industry, even after the effects of the recession subside. Although President Obama put in place some restrictions that Adam Smith would agree with, Smith would further tighten the reins on the industry. The permanent regulations that he would encourage are: restrictions to where the bailout money is allocated to, documents and programs to regulate and track all finances within the company, and which companies would receive bailout money based off of their willingness to reevaluate their company structure. For example, companies would not be allowed to use the bailout compensation for executive or senior employee bonuses. They should reinvest the money into the growth of their company. The government should put in place systems that trace where the bailout subsides is being spent to further prevent a future bailout. The White House should also look at specific banks and evaluate their inner workings and management to make sure that they are a company whose looking out for the customers best interest.
 * __Further Bailout Assurances:__**

Works Cited: ** Amadeo, Kimberly. "Bank Bailout Bill - What Exactly Is in the Bank Bailout Bill." US Economy and Business - US Economic Indicators - US Economic News. 29 Dec. 2009. Web. 09 Apr. 2010. < [|http://useconomy.about.com/ od/criticalssues/a/govt_ bailout.htm] <span style="font-family: Tahoma,Geneva,sans-serif;">>. Calmes, Jackie. "Obama Weighs Tax on Banks to Recoup Bailout Aid and Cut Deficit - NYTimes.com." The New York Times - Breaking News, World News & Multimedia. 11 Jan. 2010. Web. 09 Apr. 2010. < <span style="font-family: Tahoma,Geneva,sans-serif; font-size: 80%; text-decoration: none;">[|http://www.nytimes.com/2010/ 01/12/business/economy/ 12bailout.html] <span style="font-family: Tahoma,Geneva,sans-serif;">>. Orol, Ronald D. "Overseer: Bank Bailout Program Has Mixed Results - MarketWatch."MarketWatch - Stock Market Quotes, Business News, Financial News. 31 Jan. 2010. Web. 09 Apr. 2010. < <span style="font-family: Tahoma,Geneva,sans-serif; font-size: 80%; text-decoration: none;">[|http://www.marketwatch.com/ story/overseer-bank-bailout- program-has-mixed-results- 2010-01-31] <span style="font-family: Tahoma,Geneva,sans-serif;">>. "Savings and Loan Bailouts." <span style="font-family: Tahoma,Geneva,sans-serif; font-size: 80%;">//<span style="font-family: Tahoma,Geneva,sans-serif;">Economics at About.Com -- Your Portal to the World of Economics. // <span style="font-family: Tahoma,Geneva,sans-serif;">Web. 10 Apr. 2010. <http://economics.about.com/od/governmenttheeconomy/a/savings_loan.htm>. <span style="font-family: Tahoma,Geneva,sans-serif;">Smith, Adam. The Theory of Moral Semtiments. Edited by Sálvio M. Soares. MetaLibri, 2005, v1.0p. Somerville, Glenn. "U.S. Bank Bailout Encourages Risky Behavior: Watchdog | Reuters." Business & Financial News, Breaking US & International News | Reuters.com. 31 Jan. 2010. Web. 09 Apr. 2010. < <span style="font-family: Tahoma,Geneva,sans-serif; text-decoration: none;">[|http://www.reuters.com/ article/idUSTRE60U09L20100131] <span style="font-family: Tahoma,Geneva,sans-serif;">>.
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