Here's the real problem with the bailout plan. It's not about any moral hazard of saving the companies/corporations just because they're so crucial to the economy (although I do agree that it's morally wrong). It's not about requiring the American people to support the bailout via their tax money (personally, I believe that citizens have the duty to support their country whether they like it or not; if not, no one told them to live in that country in the first place). The problem is that people are looking into the short term and not into consequences further down the road. And, in doing so, they're failing to trace the cause (I decided "put the blame" would be a fairly inappropriate way to phrase that) to the right source.
By approving the bailout plan, we'd be supporting more governmental control in the economy. Would we, then, actually be sacrificing our freedom for security? One of the so-called "fundamental American values"? Even if we did that (the US losing its tag of the democratic and free nation in the process), that still doesn't solve the problem. Short-term security almost never translates into long-term stability. By generating sufficient funds to support the bailout, further inflation would result, and we all know what that's going to do to the already-spiraling US dollar. With a weak dollar, what would happen (besides the Europeans laughing at us) is the world economy being seriously affected.
Not to mention, again, that freedom would be sacrificed for a short-term security measure that would be disastrous in the long term.
(A very animated) Ron Paul seems to share the same view: http://www.youtube.com/watch?v=YBVB1Uc0nko
McCotter's Vocal Criticism to the Bailout Bill
While the House is debating and voting on the bailout bill, a Republican Representative from Michigan, Thaddeus McCotter, is a vocal critic of the bill. He said the bill posed a choice between the loss of prosperity in the short term or economic freedom in the long term. He said once the federal government enters the financial market place, it will not leave. "The choice is stark," he said. He also compared the bailout to the Bolshevik Revolution, saying that it is a choice between "bread or freedom." Although it is debatable that his stirring speeches caused the bill to fail, I wonder if McCotter's words had any impact on lawmakers' subconsciousness. Did they really think, "Maybe this will one day haunt us..." Any thoughts?
To Bail Out or Not to Bail Out?
As Michael mentioned, the issue of a bailout of financial firms holding so-called "toxic assets" on their books was raised at the Town Hall meeting last night. We discussed both sides of the matter, but failed to reach a definitive conclusion. The Treasury's proposed bailout has been amended from its original version; rather than having the federal government purchase the securities directly from the ailing financial firms as was initially suggested, the Treasury would, in effect, act as an insurer and provide security to private firms that buy the assets.
Our discussion at the meeting centered primarily around the issue of whether or not the Treasury Department should be proposing the package at all. Economists have weighed in on both sides of the issue. A plethora of economic heavyweights have voiced opposition, based on a number of factors. Two primary issues that they have taken with the plan are as follows: 1) the seemingly unwarranted burden that would be placed on the average American through taxes to finance the deal, and 2) the concern over a case of moral hazard being presented to the firms bailed out.
Conversely, the plan has been defended on a number of fronts. A compelling argument in favor of the bailout plan would seem to be the potential danger posed to the greater American economy if such a deal were not enacted. It is constructive to note that many financial institutions as well as other corporations have significant portions of their assets tied up in credit markets, some of which remain frozen. If these firms are not able to gain access to cash, we could very well see a leftward shift in aggregate demand, resulting in inhibited growth and income per capita.
Other thoughts?
Addendum: Insurers in the private sector use statistical analysis to calculate the expected value of a given event occurring, and base premium payments on that calculation in an attempt to make a profit. Although the Treasury is certainly not trying to turn a profit from this deal, I'd be interested to know their calculation of an expected value of the further depreciation of these assets after their transfer.
Our discussion at the meeting centered primarily around the issue of whether or not the Treasury Department should be proposing the package at all. Economists have weighed in on both sides of the issue. A plethora of economic heavyweights have voiced opposition, based on a number of factors. Two primary issues that they have taken with the plan are as follows: 1) the seemingly unwarranted burden that would be placed on the average American through taxes to finance the deal, and 2) the concern over a case of moral hazard being presented to the firms bailed out.
Conversely, the plan has been defended on a number of fronts. A compelling argument in favor of the bailout plan would seem to be the potential danger posed to the greater American economy if such a deal were not enacted. It is constructive to note that many financial institutions as well as other corporations have significant portions of their assets tied up in credit markets, some of which remain frozen. If these firms are not able to gain access to cash, we could very well see a leftward shift in aggregate demand, resulting in inhibited growth and income per capita.
Other thoughts?
Addendum: Insurers in the private sector use statistical analysis to calculate the expected value of a given event occurring, and base premium payments on that calculation in an attempt to make a profit. Although the Treasury is certainly not trying to turn a profit from this deal, I'd be interested to know their calculation of an expected value of the further depreciation of these assets after their transfer.
David Brooks on Dubious Regulation
At the EA's first Town Hall last night, I mentioned this article by NY Times columnist David Brooks. In it, Brooks questions both the need for more rigorous financial regulation and the ability to implement it.
I thought this quote was especially insightful:
"We don't even have a clear explanation about the past, yet we're also going to need regulators who understand the present and can diagnose the future."
McCain, Obama, and Dilbert
Scott Adams, the creator of Dilbert (and an economics major), recently took a poll of American Economic Association members about the candidates' policies. The results can be found here (the CNN article, via Mankiw's blog).
The economy has been the most important issue since March, and the events of the past week have only magnified its importance. Still, it's important to remember that the president has a limited amount of influence when it comes to economic policy. The executive's actions are obviously important (e.g. Treasury Secretary Henry Paulson's recent prominence), but the Congress still has the final say in fiscal matters, and the Fed has almost complete control over monetary policy.
George Mason professor Tyler Cowen has an excellent description of how presidential elections relate to economic policy in this NY Times article.
Welcome to the Blog
Hey everyone,
This blog is a way for EA members to contribute interesting articles that they read online, comment on a publication, or discuss current economic issues. If you would like to post comments and/or opinions on the blog, please email us to receive author privileges.
Thanks so much for being an active part of the EA. We look forward to hearing your opinions on the many current economic issues affecting us today.
This blog is a way for EA members to contribute interesting articles that they read online, comment on a publication, or discuss current economic issues. If you would like to post comments and/or opinions on the blog, please email us to receive author privileges.
Thanks so much for being an active part of the EA. We look forward to hearing your opinions on the many current economic issues affecting us today.
Subscribe to:
Posts (Atom)
