Bailing Out the Bailout?

I have mixed feelings over the recently defeated bailout bill. I would like to see the American economy succeed without it, but there are strong indications that some sort of bailout is necessary to keep the economy afloat. Still, no one seems to know whether the bailout will succeed in fixing our problems or only delay the inevitable, perhaps even making things worse.

I can see why Congress is so divided on the bill. $700 billion ($700,000,000,000) is a lot of money to throw around when you are not sure if it will even work. As Bob Krumm writes:

How big is $700 billion? This source reports that to date America has spent $583 billion to fight the war in Iraq. That’s right, we taxpayers are being asked to add an immediate expense to the federal budget that is more than $100 billion greater than has already been spent on more than five years of war. (Bob Krumm: Call me a skeptic)

Of course the $1.1 trillion ($1,100,000,000,000) lost on Wall Street yesterday cannot be ignored either, although thankfully we are seeing some of that made back today. Thomas Sowell at Townhall recognizes the difficulties but still ends up arguing against the bailout:

Fannie Mae and Freddie Mac do not deserve to be bailed out, but neither do workers, families and businesses deserve to be put through the economic wringer by a collapse of credit markets, such as occurred during the Great Depression of the 1930s.

Neither do the voters deserve to be deceived on the eve of an election by the notion that this is a failure of free markets that should be replaced by political micro-managing.

If Fannie Mae and Freddie Mac were free market institutions they could not have gotten away with their risky financial practices because no one would have bought their securities without the implicit assumption that the politicians would bail them out.

It would be better if no such government-supported enterprises had been created in the first place and mortgages were in fact left to the free market. This bailout creates the expectation of future bailouts.

Phasing out Fannie Mae and Freddie Mac would make much more sense than letting politicians play politics with them again, with the risk and expense being again loaded onto the taxpayers. (Thomas Sowell: Bailout Politics)

Meanwhile Terence Corcoran at the Financial Post argues that we should let the market correct itself.

It would be unwise to read too much into the Dow plunge, or to link it exclusively to the political circus in Washington. Stocks appeared to be heading lower no matter how Congress voted. Indeed, from the moment congressional leaders announced Sunday they had a deal, filled with anti-market schemes and regulation, stock prices began falling in Asia and Europe. Early yesterday, when it was expected the bailout would be approved, the Dow was down 500 points.

Bailout or no bailout, the stock markets were heading lower as financial markets continue to undergo massive asset revaluations. No matter what elaborate new rescue packages Congress, the Bush administration and the U.S. Federal Reserve bring to the party, the market is going to continue marking stock prices and other assets down until values reach realistic levels.

This is not, nor can it be, the beginning of the end of the U.S. or world financial system. It’s simply how the financial market works, how it should work. And it is working, whatever the games being played out in Washington and whatever their belief that governments can resolve the crisis. (Financial Post: Financial markets go up and down as they should)

So, what do you think? Should we be bailing out the bailout? Or let the economy run its course?

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6 Comments

  1. 3D says:

    I think that economic fundamentalists (such as Mr. Sowell) got us into this mess, and they should do what all fundamentalists do, upon seeing the painful error of their dogmatic thinking: Pray for forgiveness. Renounce their simple answers… What galls Americans is that Bush, Sowell et al. are busy doing anything but that. Their solution to this crisis amounts to socialism for the rich. For the past 25 years they couldn’t be bothered to engage the commonweal in dispersing the fruits of deregulation, but now, as catastrophe looms, their idea of justice is to disperse the burden upon us all.

  2. Ray Fowler says:

    3D – So I’m guessing you’re not a big fan of either Sowell or Bush. Of course in this case Bush is for the bailout and and Sowell is against it. Regardless of how we got here (and you read two different stories on that depending on whether you’re reading conservative or liberal websites), what is the solution now? Bailout or not? Who’s right – Sowell or Bush? One-third of the Democrats or two-thirds of the Democrats? Two-thirds of the Republicans or one-third of the Republicans? Or is there a third way?

  3. 3D says:

    What matters is recognizing the trajectory that got us here and veering from it. A process that should call us up short for failing to acknowledge the interdependencies among us — for failing to acknowledge one of the most commonly recognized spiritual dimensions of living together.

    (Oh, and the explanations from the Red side of the web lack the persuasive power of common sense. Economic fundamentalism has determined US policy for over 25 years. As a result of it, here we are.)

  4. Ray Fowler says:

    3D – I agree, it is important to understand how we got here so we can make changes for the future. And yes, we should do more to recognize the delicate interdependencies that exist between all human beings. Author and poet Charles Williams liked to call this “the web of life.”

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