Policy Experts Offer Bailout Comments

September 30, 2008
Dan Miller

The national debate over how to address the crisis in the U.S. financial markets has created sharp divisions that cross political and philosophical lines. One thing is clear: What the federal government chooses to do or not do will have serious consequences that will almost certainly be long-lasting.

The following is a sampling of some of the thinking and recommendations solicited by The Heartland Institute or sent to us by interested parties. Contact information is provided if you wish further information from the experts quoted here.

 


 

"The whole world is watching America, and we need to remember that this is the ultimate reality show -- with real and potentially disastrous consequences.

"You don’t have to believe the politicians. They’ve cried 'wolf' too many times, and have a history of turning big problems into expensive catastrophes while they grab power.

"But the global markets are speaking decisively about the critical financial situation. The interest rate that banks pay to borrow from other financial institutions has soared. No bank trusts that the other will be able to repay the loan.

"There are no guarantees that this plan will work -- only the certainty that the consequences will be huge if Congress fails to act. And if Congress does act, risk remains.

"Free markets may go to extremes -- though no one complained they were making too much money when home prices were rising! Now we’re headed toward the opposite extreme -- of falling prices and recession. It’s time to act -- responsibly."

Terry Savage
Syndicated Financial Columnist
terry@terrysavag.com
(312) 266-1717

 


 

"Given the loss in confidence in capital markets and the freezing up in credit, the mega bailout seems to be the only thing left that has the potential to help avoid a cascading collapse in financial markets that has already begun to spread to the rest of the economy.

"The decision to back all Fannie and Freddie debt 100 percent but wipe out preferred shareholders not only perpetuated the uncertainty over capital market values, it also wiped out over $30 billion of capital. Most of this capital was in the hands of financial institutions such as banks, savings and loans, and credit unions.

"This decision led to a run on certain banks that brought the crisis to its current stage.

"Supporting the preferred stock completely would have cost the Treasury about $30 billion to $40 billion. Settling up for half would have cost $15 billion to $20 billion. Failing to support the preferred stock of government-sponsored agencies led to a massive collapse in capital throughout the financial system.

"This collapse precipitated the need for a massive injection of liquidity on the part of the Fed and hundreds of billions of taxpayer funds to restore confidence.

"Faced with this debacle, the proposed mega bailout may be the only game in town."

Robert Genetski
Robert Genetski & Associates
(616) 990-1354
rgenetski@classicalprinciples.com

 


 

"There is an interesting parallel between the sharp downturn in economic activity in 1937-38 and the current effort to bailout the finance industry. Government actions do not always achieve the intended goals.

"The recovery from the Great Depression was well on its way in the middle 1930s when the Federal Reserve observed that banks were holding more than twice the level of reserves required by the Fed. Given the authority under the Banking Act of 1935, the Board of Governors of the Federal Reserve System doubled the reserve requirement of member banks between August 15, 1936 and May 1, 1937. The feeling was that doubling the reserve requirement would generate an increase in public confidence and would not change the behavior of the banks. However, the banks responded to the Fed’s signal by sharply increasing their already-sufficient reserves. The result was the 'over-deflation by the mid summer of 1937' and the subsequent sharpest downturn in U.S. economic activity in history. ["Theories of the 1937-38 Crisis and Depression," Melvin D. Brockie, The Economic Journal, Vol. 60, No. 238 (June 1950), pp. 292-310]

"The current Treasury Plan to bail out the banks by purchasing the 'toxic' mortgage loans has been deemed necessary to 'unfreeze' the credit market. The cost has been estimated by the Treasury to be at least $700 billion and as much as one trillion dollars. But what guarantees that the banks will loosen up and return to the precrisis level of borrowing and lending? It seems to me that banks will be very careful to avoid climbing back on the limb that nearly got sawed off. Credit will remain tight and loans will be offered only to the safest borrowers and at higher interest rates.

"This, added to the huge tax increase and more inflation from the Fed, is a prescription for replacing the depression of 1937-38 with the downturn of 2008 as the sharpest in U.S. history."

Jim Johnston
Senior Fellow
The Heartland Institute
jjohnston@heartland.org

 


 

“There shouldn’t be a ‘bailout’ of specific firms. It would only encourage more risky behavior and divert more business effort toward lobbying. Insolvent firms and individuals should go through existing bankruptcy procedures. Bank depositors should be protected up to the amounts specified by the FDIC.

“The Federal Reserve should provide credit to the banking system, as needed, by buying government securities.”

John Semmens
Economist
Laissez Faire Institute
jsemmens@cox.net
(480) 940-9824


“No one hates capitalism more than capitalists. Capitalists prefer the stability and predictability of the known over anything unknown, especially when it promises to socialize their losses on the rest of us. Capitalists have long despised the uncertainty and unpredictability of a truly free market, and have frequently succeeded at using the state to reduce that uncertainty.

“Those of us concerned with preserving whatever bits of capitalism we have left should be largely ignoring ‘The Market’s’ response to the various bailout plans. What’s good for General Motors or the financial sector is not necessarily what’s good for America. In fact, what’s good for America might be very, very bad for the financial sector. The desire for stability and predictability has been the calling card of dirigisme regimes since the dawn of capitalism, whether they called themselves socialist, fascist, or just plain interventionist. It is but a thinly disguised power grab by those who own the means of production, and who will profit at our expense, rather than profiting by serving us better.

“‘Stability’ is a siren song that we must do our best to ignore, lest we enable them to make an even bigger mess than they already have.”

Steven Horwitz
Charles A. Dana Professor of Economics
St. Lawrence University
Canton, New York
sghorwitz@stlawu.edu
(315) 229-5731


“The bailout is truly amazing. The government’s response has overwhelmed me with its audacity and stupidity.

“My first reaction is that this is all immoral, because the problem is in financial markets. The same people who have been making enormous bonuses, reaping tremendous rewards, have made tremendous mistakes. And now your average taxpayer is bailing them out. People who have not benefitted, who have a hard time filling their gas tanks, are going to be paying for this.

“As an economist, I know these bailouts don’t work. Rewarding people who have made such gargantuan mistakes and punishing people who haven’t made these mistakes sends wrong signals. And it doesn’t clean up the financial mess. Bankruptcies, consolidations, mergers, buyouts, is how to unwind this mess. Bailouts encourage people to not act.

“These bailouts actually make things worse. First, they increase the moral hazard problem. If government bails out people in this position, those people are likely again to take highly speculative risks.

“We also know from previous episodes that when you introduce bailout packages of this nature, the economic depression lasts much longer and total costs are much higher. We saw this in Japan in the 1990s. Their real estate market was in the tank for 15 years. They had a sputtering economy despite 0 percent interest rates and record public works projects. They made the problems worse.

“Here in the U.S. we had a big bubble in the 1960s. Instead of allowing things to unravel in the 1970s, we went off the gold standard and pumped the money supply and had wage and price controls and bailed out New York City. Serious economic problems lasted until 1982.”

Mark Thornton
Economist/Senior Resident Fellow
Ludwig von Mises Institute
Auburn, Alabama
contact@mises.org
(334) 321-2100


“To a supporter of capitalism and free markets, the current debate over a Treasury Department proposal for a $700 billion fund to purchase illiquid assets is troubling on many fronts.

“First, when the public hears that the government must save the economy from capitalism run amok, it loses faith in our free-market system. In other words, the huge Treasury proposal has accelerated the momentum toward political populism.

“Second, it seems clear that much of the current crisis has been exacerbated by mark-to-market accounting, which has created massive and unnecessary losses for financial firms. These losses, caused because the current price of many illiquid securities is well below the true hold-to-maturity value, could have been avoided. The current crisis is actually smaller than the 1980s and 1990s bank and savings and loan crisis, but is being made dramatically worse by the current accounting rules. “And, third, a temporary and targeted change in mark-to-market accounting rules could help solve the current financial market problems at much lower cost. But this alternative has been dismissed with very little in the way of debate.”

Brian Wesbury
Chief Economist
First Trust Advisors
bwesbury@fgadvisors.com
(630) 322-7756


“It’s no coincidence that, while the credit crisis has been unfolding for well over a year, markets have only truly become unhinged since the failure of Bear Stearns, when the government first began using taxpayers’ money to directly participate in private trade.

“Every intervention since, including bailouts of Freddie Mac (FRE) and Fannie Mae (FNM), the SEC’s short-selling ban and rescue loan to AIG (AIG:), has been enacted to supposedly ‘restore confidence.’”

“Yet the more the government intervenes, the more erratic the markets become. Over the last seven trading days, just as the $700 billion bailout proposal was being pitched, the market has moved 3 percent or more on five occasions -- a historic period of short-term volatility.

“Whether the final price tag is $700 billion or not, just as with Sarbanes-Oxley or the Patriot Act, the government’s need to ‘do something’ will deliver a cure that’s much worse than the disease, (likely) turning a normal two-year correction into a multi-decade Depression.

“The Barack Obama and John McCain campaigns issued a joint statement Wednesday night proclaiming that ‘this is a time to rise above politics for the good of the country.’ Fat chance. Politics is at the very heart of the problem: A capitalist economy can’t be fixed with socialist ideals.”

Jonathan Hoenig
Managing Partner
Capitalistpig Hedge Fund
jonathan@capitalistpig.com
(312) 588-1685


“Substituting social engineering (such as executive compensation caps) and socialized losses for market discipline (taking your lumps on bad investments, reaping the rewards of good ones) is no way to restore soundness to credit markets and no way to encourage responsible lending practices, now or in the future.”

Alexei Marcoux
Associate Professor of Business Ethics
Graduate School of Business
Loyola University Chicago
alexei.marcoux@gmail.com
(312) 914-5096
 


"The size of the bailout far exceeds the total amount needed to buy up all the bad mortgages, given that we've already pledged huge sums of money to Fannie Mae and Freddie Mac, which are at the heart of this problem. So there is no need for the federal government to demand anywhere near $700 billion of additional money.
 
"More troubling to me than the amount of money, though, is the amount of power that is being demanded. Federal lawmakers and bureaucrats for years heard warnings about the government creating a housing bubble because of its easy credit policies, and they did nothing. They heard about financial shenanigans at Fannie and Freddie, and repeatedly blocked reforms, allowing those shenanigans to continue.
 
“Now some of those same people are demanding that we rush headlong into an enormous expansion of government power in exchange for saving us from the crisis their policies and political interference helped create. This after several prior bailout maneuvers this year have done nothing to solve problems and may have made things worse, according to many economists.
 
“Congress should let traditional solutions play out. This means bankruptcies, consolidations, mergers, and acquisitions.”
 
Steve Stanek
Managing Editor
Budget & Tax News
sstanek@heartland.org
(815) 385-5602