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Two views on the financial bailout

 

Last updated 10/9/2008 at Noon



Courtesy of Center for Vision & Values at Grove City College

Thoughts on ‘the Big Bailout’

Dr. Mark W. Hendrickson

The biggest bailout plan (so far) will continue to be revised in an attempt to win approval of a congressional majority. The goal of the Emergency Economic Stabilization Act of 2008 is to put the brakes on the unwinding of the largest debt and leverage bubble in history in the hope of preventing a crash.

The partisan politics of the bailout negotiations have been fascinating. A majority of congressional Democrats favor the bailout, even though polls show most Americans dislike it. A majority of Republicans have resisted the bailout.

This is a very high-risk strategy, because if the financial system collapses before Election Day, the public probably would take it out on the party currently in the White House, thereby guaranteeing a Democratic triumph in the November elections.

One particularly cynical aspect of the bailout negotiations was the Democrats’ request for 20 percent of any profits that the Treasury might make on the eventual sale of assets that they would purchase under the plan; those profits would go to groups that serve as slush funds and lobbyists for Democratic special interests. The profits would go there instead of back to the Treasury. Republicans naturally balked at agreeing to fund the Democratic political machine as a condition of trying to rescue the country.

The heart of the plan is to allow the Treasury to purchase bad mortgages from various financial institutions. Officially, there are 117 banks on the FDIC’s “in trouble” list, but private estimates say it’s more like 1,400 banks. How will Treasury decide which firms to save? Will there be a merit system, or will it all boil down to who has the best personal connections and most influential lobbyists?

The original wording of Treasury Secretary Paulson’s proposal included a provision that would make his office’s decisions un-reviewable and irreversible. It would utterly banish the “checks and balances” principle of our representative system of government.

I’m not sure that King Solomon, with all his legendary wisdom, could solve this problem.

Stop the Bailout!

Dr. Shawn Ritenour

The financial bailout is a gigantic rip-off and must be stopped. All US taxpayers are on the verge of being looted to bail out financiers that made a bunch of bad investments. This bailout is morally wrong and in the long run will only harm the prospects of economic prosperity.

The economic problem we are in is ultimately due to capital malinvestment encouraged by government intervention in the money and banking system, including a Federal Reserve that has engaged in irresponsible inflation via credit expansion after the tech-stock bubble burst and after the terrorist attacks of 9-11.

In order for our economy to return to sound footing, the bad investments already made must be liquidated. In other words, firms that cannot survive financially must be allowed to go bankrupt. This is what happened after the recession of 1921-22, which was sharper and deeper than the recession of 1929-30. However, we don’t read of the Great Depression of the 1920s because markets were allowed to adjust, bad investments were liquidated and the economy recovered in about a year. Later, Presidents Hoover and then Roosevelt did not allow this to happen in the 1930s and the agony was prolonged, turning a recession into the Great Depression.

We should also ask, just where is the $700,000,000,000 going to come from to pay for this bailout? When the government spends money, it has only three options for financing: the US government would either have to increase taxes to pay for the whole $700 billion, borrow the $700 billion or inflate the money supply by that amount. Or, the government could do some combination of the three.

None of these are good options. The best thing to do is let the firms that are in trouble because of bad investments go bankrupt and allow the market to adjust. There will be pain for sure, but the world will not end, and no one would be robbed.

 

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