Financial sector: Bail it out or let it sink?
Should taxpayers spend $700 billion to keep troubled financial institutions afloat? The Observer asked two experts who study the economy to argue their sides.
09/23/2008 12:00 AM
09/23/2008 5:53 AM
YES: Money, credit are life of the economy
From Michael L. Walden, economics professor at N.C. State University.
The patient is on the operating table, clinging to life. Doctors have a choice – do they do everything they can to save the life, or do they discuss what put the patient at death's door? Of course, the answer is obvious. They first try to save the life, and then later, when the patient has recovered, they talk about lifestyle and other changes to prevent a reoccurrence.
Although somewhat melodramatic, the analogy describes why the federal government's bailout of the financial system has been necessary. Money and credit is the lifeblood of our economy – indeed – any economy. The losses and fears plaguing our financial system created the real possibility of hardening of the arteries of credit flows. If this happened, businesses would have shut down and both bankruptcies and unemployment would have soared. Only the federal government – with its power and deep pocket – could restore the movement of money.
Certainly there will be a cost to taxpayers – but the alternative cost would have been much higher. And there's also a silver lining. The federal government is acquiring real assets. While those assets may be heavily discounted now, it's quite possible the values will eventually rise. So we (taxpayers) may realize an eventual profit.
Still, after the patient is back on his feet, causes and remedies must be examined. What role did the low interest rates, easy money, globalization of credit markets, exotic loans and investments, tax laws, and soaring home prices play ? Should we ever separate risk and reward, as happened with Fannie Mae and Freddie Mac? Is more federal involvement in the housing and credit markets the answer, or part of the problem?
These are all important questions which must be answered, but first the patient – the financial system – has to live. The bailout – however distasteful – has given us this chance.
NO: Credit crunch will sort itself out in time
From Mike Munger, a Duke University professor of economics and political science, and the Libertarian candidate for governor.
“The state is the great fiction by which each of us seeks to live at the expense of all of us.” The 19th French economist Frederic Bastiat recognized something that seems to be eluding our wise men in Washington, and Wall Street.
If Bastiat were alive, I can guess his reaction to the bailout: First, we don't know what we are doing, and we are as likely to do harm as help. The desperate hurry comes from electoral politics, and not from any real economic necessity.
Second, we aren't creating value. Government can't create value in financial markets. All we are doing is shifting costs from one group (Wall Street bankers, and mortgage sellers who took enormous and unsupportable risks) and transferring them to another group (taxpayers, who don't know any better).
When you hear someone say “The government bailout of Wall Street,” make a mental substitution: “The taxpayer-funded bailout of Wall Street.” And then remember that we have a federal debt bigger than Jupiter.
Deficits are future taxes. The bailout is simply a way of allowing irresponsible lenders to escape unharmed. If you have a mortgage, and can't pay, then you are responsible. If AIG has debts and can't pay, our leaders want to soak taxpayers for the bill.
The point is that you can't take money away from taxpayers who earned it, give it to the financiers who squandered it, and call that a good policy. There is no danger of another Depression, which was caused by a deflationary monetary policy. We are facing a temporary credit crunch, and it will sort itself out if we leave it alone. Things aren't so bad that a panicked bunch of politicians can't make it much, much worse.
Each can't live at the expense of all. Not even if you are a rich banker.
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