American Banks Imploding

Yesterday was the worst day in years for North American stock markets, which crumbled under the weight of a bankruptcy filing from Lehman Brothers Inc. and Bank of America Corp.'s takeover of Merrill Lynch & Co. Inc. American International Group (AIG) also announced it was seeking $40 billion in emergency funds to help it avoid a credit crisis.

The Dow Jones industrial average plunged 503 points, or 4.5%, in its biggest single-day point loss since September, 2001. The S&P/TSX lost 515 points, or 4%, to close at 12,254.

U.S. Treasury Secretary Henry Paulson tried to reassure investors that the United States's financial system was able to withstand the current crisis, and said the government would step in to prevent further turmoil if necessary. Last week, it took over the operations of Freddie Mac and Fannie Mae to safeguard $5-trillion in mortgages.

So will Uncle Sam step in and provide more financial bailouts to America's imploding banking industry? Foolhardy seems like a choice word to describe such an action.

When governments bail out their large corporations it sets a bad standard and creates a false sense of security. These banks are now like children living in Uncle Sam's basement, but sooner or later Uncle Sam is going to say "No, you're on your own." This whole bailout system is the result of nepotism and corruption within the government and the American banking system, to say nothing of incompetence and greed.

Possible fraud within these corporations could also be a factor, but at the present it looks like the banks just got greedy by handing out too many sub-prime mortgages when they didn't have the money to cover them.

Part of the systemic problem is that the whole mortgage industry is reliant upon housing prices going up and down, and a housing price crash throws the whole system into turmoil. It makes for a decent argument for why housing prices should be at least partially government regulated. After all the government sets standards for property taxes, so why not use those standards as a "bare minimum" for housing prices too? Thus it would prevent housing prices from slipping too much in the event of a crash.