Monday, November 24, 2008

Opposing the Bailout

Back in September, Treasury Secretary Henry Paulson convinced Congress that he needed $700 billion in order to bail out failed mortgage giants Fannie Mae and Freddie Mac. Paulson promised to use the money to buy up troubled mortgages owned by the two companies, which would eliminate billions of dollars in liabilities for these corporations. Congress passed the bill, and then Paulson announced that he would use the money to buy stock in banks too. And also bail out AIG, and Bear Sterns too while he had the money. And American Express.

Now Congress is thinking of bailing out the Big Three automakers in order to rescue them from the consequences of years of mismanagement. And recently, the federal government has assured Citigroup that it will try to shore it up by injecting another twenty billion dollars into the company, in addition to the twenty-five billion it put into it a few weeks ago .

It’s a key tenet of Keynesian economics that raising taxes during a recession is very harmful, so it’s a mystery where Congress thinks it will find the money to pay for all these bailouts. The deficit was high enough before the bailout (around a half trillion); now, some estimates put the 2009 deficit at over a trillion dollars. Apparently, Congress has just given up on ever controlling the national debt, and will spend with absolutely no consideration for what its resources are.

Apart from the financing of the bailout, conservatives should oppose it on the grounds that it represents a massive and unwarranted government intrusion into the economy. (It might be a bit of an exaggeration to say an “unprecedented” intrusion into the economy—the saving and loans bailout, the Great Society, and the New Deal spring to mind—but it’s close). It should be quite unbelievable that a Republican president favors partially nationalizing financial institutions, or supports spending what will almost certainly be well over a trillion dollars at one go. The bailout represents George W. Bush’s final betrayal of conservatives.

Conservatives should (and for the most part, do) reject Paulson’s heavy-handed efforts. So should liberals. The implementation of the bailout is an unholy alliance between big business and big government—it combines the worst aspects of capitalism and socialism.

The bailout is, in essence, a massive insurance policy for corporations. It destroys the concept of moral hazard, that a firm that takes a gamble risks losing everything. In our current climate, any firm that is in any danger of bankruptcy needs only to ask the federal government for a spot of help, and it will be rescued at taxpayer expense. This arrangement is a blatant abuse of power by both business and government.

Defenders of the bailout claim that the companies being bailed out are “too big to fail,” and that their size and role in the economy make bailing them out less painful than not doing so. That was, possibly, true for Fannie and Freddie—they were massive corporations partly controlled by the government. But there can’t be many more—there is simply no possible way that American Express, GM, Citigroup, and AIG were all too big to fail.

Even if we accept that every company bailed out was, in fact, too big to fail (and if, say, GM, were to fail, the consequences would undoubtedly be horrible), the bailout would still be unjustified. If our economy is so fragile that over five crucial corporations can fail within three months, then any bailout is a Band-Aid on a gunshot wound. Injecting money into the system won’t address any of the underlying reason any of these corporations went under, and in most cases is only throwing good money after bad.

12 Comments:

At November 24, 2008 at 10:43 PM , Blogger Mberenis said...

I think WE need a bailout. So I did some research and found tons of great bailout's for us that no one talks about.

Check out current bailouts for us.
Bailout Types for 2009

 
At November 25, 2008 at 2:20 AM , Blogger Steve_B said...

I couldn't agree more. And in fact history proves you right. All but one of the companies the Dow started with are gone now. And they were all "too big to fail." Capitalism is messy, but it works if you let it.
I wrote on this topic here:
http://rockefellerconservative.blogspot.com/2008/11/to-bail-out-or-not-to-bail-out.html

 
At November 25, 2008 at 6:02 AM , Blogger Name: Soapboxgod said...

Keynesian is exactly what it is and it doesn't work. The "hope" in all of this bailout nonsense is that by raising demand, productivity will follow. It doesn't work and none of these imbeciles has a clue. You can't simply continue pumping money into the economy and expect that productivity is going to catch up. You've got all this money flowing and fewer and fewer goods chaising those dollars.

How is it you have demand without production? Simple answer...you can't.

The whole damn process has been a failure.

 
At November 25, 2008 at 6:17 AM , Blogger David#999 said...

Two days after he confessed to not having a plan for the banking crisis, Barack Obama called for ‘decisive action’ while offering absolutely no new ideas, policies or concrete solutions — it shows he is just not ready to lead

 
At November 25, 2008 at 6:29 AM , Blogger David#999 said...

Experts say the most important thing that needs to happen before the $700 billion bailout even has a chance of working: Home prices must stop falling. That would send a signal to banks that the worst has passed and it's safe to start doling out money again.

So, it's Catch 22. Until home prices stop falling because there are buyers the banks won't begin lending and home prices will continue to fall because the banks won't lend money for a mortgage even to qualified buyers. The net result will be that the vast amount of the $700 billion will go into the pockets of the Wall Street bunch that created the problem with their "creative" approach to financial operations.

But as for GM, a GM Bankruptcy will drag all detroit three auto mfgs into bankruptcy because no one could be as cost-competitive as GM. And if all detroit three go under, many suppliers (if not most) will also be bankrupt very soon. It's so funny those financial companies always tried to convince us that bailing out those wall street liars and robbers is a right thing while saving a company who produce real goods rather than worthless paper is not justified. A contry as big as US cannot be sustainable without a strong real economy. I cannot imagine we can keep playing this money-moving game forever. Let real economy fail and one day we would not be able to buy anything from other countries with worthless dollar.

 
At November 25, 2008 at 8:36 PM , Blogger WomanHonorThyself said...

excellent post about this issue..say hello to tyranny ala Hussein Obama!!

 
At November 28, 2008 at 8:26 PM , Blogger road warrior said...

How would it cost to "bail out" people who don't have clean drinking water, or children that are starving to death in our world? I can even imagine bailing out the auto industry with 700 billion dollars. Seriously. the one Obama gets into office you know the illuminati are going to go through with this bail out, blows my mind.

 
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