the Chrysler Bailout on Steroids?
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The Chrysler Bailout on Steroids?
The best thing that can be said about the now-signed bailout legislation is that is carries on a tradition of financially rescuing economically challenged businesses, one that notably included the government loan to Chrysler. The automaker has survived but has never flourished because of inherent structural problems and corporate cultural dysfunctions. The difference in scale is staggering - .7 trillion dollars is an appreciable fraction of the nation's annual budget.
Every recession produces federal budget deficits. The downside in the current bailout is captured in the following question: Suppose the recession is not affected at all by Paulson's magic plan. Where is the next .7 trillion dollars coming from?
The McCain campaign seems to be cratering at the moment. To be fair, neither candidate has a good handle on the current economic mess. This will not be a fun presidency.
A long time friend – who opposed the bailout – wrote the following reproduced with his permission. His letter was not published.
You accuse Congress of standing by while America burns. Yet the members of Congress who voted against the Paulson plan may be closer to Cato than Nero. They blocked an expensive bailout of Wall Street by a Secretary of the Treasury who is himself a recent member of the Street. They have slowed down an ever more aggrandizing Federal Reserve, whose cheap credit policies are partly responsible for the present mess. And Congressional naysayers have given the Republic some breathing room, so that we may soberly consider whether a massive scheme to save financiers from the effects of their bad decisions is necessary. It probably is not. The Federal Deposit Insurance Corporation may be able to dispose of bad loans and bad executives more effectively than Mr. Paulson and his successors; William Issac, a former chairman of the FDIC, thinks that it can. (See "A Better Way to Aid Banks" in last Friday's Washington Post.) The Department of the Treasury and the Federal Reserve System have effective weapons at their disposal to prevent thirties-style bank runs. Savvy investment firms are working out deals to buy troubled banks and brokerages.
The financial crisis is serious. Hundreds of billions of investment capital have been squandered. A recession looms. Congress should act, but not before it considers alternatives. America is a Republic, not an Empire, and we have time to think before taking out a $700 billion mortgage on our children's future.
Sincerely,
Jack High
Professor of Economics
School of Public Policy
George Mason University
Fairfax, VA
Professor Jack High was not alone in this opinion. More than 100 highly qualified economists agreed. But here's the rub: few of the critics had a solution other than “let the fed do what it normally does in these situations”. But once the “Paulson panic” was unleashed, the light-touch-under-the -radar solution was a political impossibility.
We are now watching political theater that has becomea very bad movie and we can't walk out.
JBG
