Statement of Fred L. Smith, Jr., President of CEI:
The bailout bill that passed the Senate is no improvement over the bill the House rightly rejected on Monday. Representatives should stick to their guns and reject the bill for the following reasons:
- The bill perpetuates an unrealistic view of homeownership. Ill-considered legislative and regulatory initiatives have turned the American dream into the American nightmare for many people. Failing to reform the political programs and pressures that triggered the current crisis merely sets us up for the next crisis.
- The bill tries to relieve symptoms without addressing causes. A lack of proper monitoring of the creative financial instruments that have evolved in recent decades has resulted in “toxic” debts that are difficult to identify and isolate. Monitoring processes must be improved to keep pace with market innovations.
- The bill may worsen the effect of mark-to-market accounting, which contrary to press reports has not been fixed by the SEC, by forcing banks to “write down” the value of similar assets when the government purchases at a discount. This loss in “regulatory capital” would decrease amounts banks could lend, ironically leading to a further contraction in credit and thereby worsening the very problem the bill hopes to alleviate.
- The bill risks far too much taxpayer money in a bailout that may not work. If the Wall Street bailout plan fails, then there will be no one to bail out taxpayers, who will be on the hook for up to $700 billion. And the federal government will then be too weak fiscally to deal with an even worse economic crisis. For that reason, the bill is riskier than doing nothing.
- The increase in the debt limit may lead indirectly to price hikes in staples such as food and oil as investors expect the new debt to be “monetized” through inflation. Speculators will likely hedge a falling currency by shifting their money to commodities, creating higher consumer prices sooner rather than later.
- More government intervention in the market may well make things worse. Interference by the federal government in market decisions is largely responsible for the current lack of liquidity. More government interference may compound rather than relieve the problem. As a recent IMF study concluded, “Providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks…[and] a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline” than would otherwise occur.
The risks of rushing this reckless bill through are immense because setting off down the wrong path now could turn a big problem into a disaster. The House should not be scared by cries of “Fire! Fire!” into gambling away $700 billion of taxpayer money. The House owes it to the American people to take whatever time and effort are necessary to determine the real nature of the current liquidity problems and then to devise more effective solutions that do not threaten to bankrupt the federal government and impoverish the next generation.
For more commentary on the bailout, visit cei.org/bailoutwatch.
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The economic problems are very common nowadays. Different issues about the unsolved financial crisis are being heard in every part of the nation and also all over the world. The government are now formulating solutions on how to stop this dilemma. Is America better off in 2008 than in 1932? It depends who you ask. In 1932, Franklin Delano Roosevelt was elected president, and took over during a time when the economy was nose diving into a recession. FDR introduced his “New Deal,†which drastically changed the government’s approach towards the U.S. economy. The government’s new role in the economy was much more involved than it had been previous to FDR. Roosevelt's “deal†revitalized the economy in the short run, but some argue the negative repercussions can still be felt today. In this Wall Street Journal article, Paul Rubin writes that although the present U.S. economy is not identical to the economy of 1932, there are many parallels: the stock market is faltering, credit markets are locking down, and a popular Democratic presidential candidate – Barack Obama – is advocating for increased government regulations in the economy. If Obama becomes president and the Senate is controlled by democrats, our country will face the most liberal agenda in its history. Free market economists are concerned with Obama’s “hands-on†policies and fear they steer the American economy off-course in the long run. Proponents of capitalism will disagree that we’re better off today than in 1932. On the contrary, they would most likely tell you that America is in for more of the same – a “New, New Deal.â€
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Americans are struggling with the current economic crisis that has been brought on by careless mortgage lending. However, America is not the only country that is negatively affected by this economic calamity. The International Herald Tribune tells its readers that the credit crunch is being felt in Europe, too. Small businesses like Dominique Boudier’s printing company, outside of Paris, rely on credit with their suppliers to operate. Boudier’s creditors are reducing their offerings by half. This cut has been mandated by the suppliers’ credit insurance companies. Considering the 60-day lag time in which clients pay, Boudier’s business needs additional cash flow to compensate for this major shortfall. Because Boudier’s bank has its hands tied as well, Boudier fears the worst. Boudier’s bank, like many others throughout Europe, started to put its money to sleep with the European Central Bank instead of investing it in other banks and the economy as a whole. When banks began to fail and liquidity was disrupted, credit began to dry up. Similar to America’s Federal Reserve Bank, the European Central Bank uses a mechanism based on the ability to produce as much fiat money as necessary. Fiat-money currency, which is essentially credit money, loses worth as soon as the government declines to further guarantee its value. Inflation is on the rise. Many people believe that stronger private banking systems that make responsible decisions will eventually solve this problem. In the meantime, payday advance loans will be easier to get for those that need short-term assistance and can’t afford to wait for the faltering central banking system.
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