The Bailout: What the Experts Are Saying

Published December 1, 2008

After surveying media coverage leading up to the two congressional votes on the federal bailout of the mortgage industry, Congressional Quarterly Managing Editor Daniel J. Parks wrote a stinging rebuke of most financial reporting of the credit crisis and the federal government’s response.

“[Y]ou would think there is universal agreement among economists that an immediate, enormous government intervention in the markets is the only way to stave off a recession, and perhaps even a depression,” Parks wrote. “This is simply false. Many economists reject the notion that something must be done immediately and have called for more careful consideration of a wider range of options. Some even reject the premise that any bailout action will make much of a difference.”

The following comments from economists, financial experts, and public policy analysts around the country confirm Parks’s statement and cast doubt on the actions the government has taken.

“Even if [Treasury Secretary Henry] Paulson unexpectedly turns out to be as pure as driven snow … the amount of confusion that he has been empowered to inject into the world’s financial markets defies comprehension. With $700 billion to throw here, there, and everywhere, for good reason or no reason, with no real accountability and no bottom lineā€”if he can’t make himself the God of Chaos by exercising these powers, then nobody on this planet can create chaos. The potential for malinvestments, general misallocation of resources, and sheer financial tomfoolery confounds the mind.”

Robert Higgs
Senior Fellow in Political Economy
Independent Institute

“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
Laissez Faire Institute

“This is simply government trying to reward its friends by seeing they don’t get hurt. It also is a grand intent to deflect blame, particularly before the election, to greedy speculators instead of foolish policies.

“No matter what policies are taken, including nothing, this crisis will pass, either with short-term pain, if we are lucky, or with long-term pain similar to the Great Depression if we let government have its way. But pain is unavoidable. I am willing to take almost any kind of pain to take back my America.”

David H. Padden
Founder and Chairman Emeritus
The Heartland Institute

“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, and buyouts are the ways to unwind this mess. Bailouts encourage people not to act.”

Mark Thornton
Economist, Senior Resident Fellow
Ludwig von Mises Institute

“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.”

Brian Wesbury
Chief Economist
First Trust Advisors

“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 the bailouts of Freddie Mac and Fannie Mae and the SEC’s short-selling ban and rescue loan to AIG, has been enacted to supposedly ‘restore confidence.’

“Yet the more the government intervenes, the more erratic the markets become.”

Jonathan Hoenig
Managing Partner
Capitalistpig Hedge Fund

“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

“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 pre-crisis 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

“This fight is not over. We will examine all options for legal action on behalf of citizens who still believe in the separation of powers. We will demand transparency of all Treasury actions and make sure the public is aware of any missteps to come. We will work with conscientious lawmakers willing to craft more intelligent solutions in the next Congress. Most of all, we will make sure through every means possible that the nation’s taxpayers know who in Washington deserted them this week.”

Pete Sepp
Vice President for Policy and Communications
National Taxpayers Union