I don’t agree with some of the underlying premises of the following letter, signed by 166 economists before it was sent to Congress. However, the letter speaks well to the extremely weak rationale for and preparation of the 700 billion dollar bailout package, and to the lack of support among people knowledgeable in economics for the plan.
I’m glad to see that John McCain’s attempt to go to Washington D.C. to lead the way to passage of a bailout package has failed. It may be necessary for the government to take strong action to protect Americans from the incompetence and corruption of Wall Street, but there is no reason to rush to put our nation’s future in the hands of people who have proven to be both selfish and inept in the handling of money.
“To the Speaker of the House of Representatives and the President pro tempore of the Senate:
As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:
1) Its fairness. The plan is a subsidy to investors at taxpayers’ expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.
2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.
3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, America’s dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.
For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.”
It doesn’t matter to me that it’s a group of Republicans who are now opposing the current bailout plan (for the wrong reasons), and a group of Democrats who are trying to push it through too quickly. What matters is that George W. Bush is not succeeding in this last effort to get Congress to pass a half-baked piece of legislation before anyone has the chance to think carefully about its implications.
A bailout is a temporary fix at best. We need to change the way we think. First of all the government needs to force the oil companies to put 85% ethanol tanks at gas stations and the automobile industry to supply the parts necessary to use the ethanol. That will lower the cost of transportation which all businesses rely on and which has driven the cost of everything up. Secondly, businesses are going to have to realize that if people are only making an average of $8 an hour and having to spend a fourth of that on fuel to get to work that they are not going to have any money left to purchase the goods that businesses make. Thirdly, the consumer is going to have to realize that if they purchase that cheaper product made in another country that they are shooting themselves in the foot because that money is not going into our economy. Every penny we spend here creates more jobs here.
My advice to the consumer is not to buy anything from a foreign manufacturer unless they have factories here as Toyota does.
If our government can seize a 100 year old bank and sell it to another bank without interrupting the assets of the banks customers
why can’t they do the same with failing companies on the stock market?
Bailout package should be passed but simultaneously effective legislation should also be enacted that will ensure that such a situation does not recur. Otherwise, bailout will be a routine procedure every time corporates fail to perform and will cause a permanent and irrepairable damage to the economy.