George W. Bush’s presidency has been a disaster. This is not breaking news. Continuing a nearly eight-year tradition, the administration’s economic stimulus proposal represents mediocrity at best and utters failure at worst. Sadly, this turd-sandwich of a plan is now our only option of stemming the most far-reaching financial disaster since the 1929 stock market crash.
Critics of any sort of bailout have dubbed it the dirtiest of words: socialism. Indeed, when Washington is throwing around gaudy numbers like $700 billion to artificially restore needed confidence in the economy, socialism is probably the case. Perhaps they are right and nothing should be done — if only to settle the debate on whether Keynesian economics prolonged the Great Depression. Most would agree that the stakes are too high to find out.
Liberals, on the other hand, are complaining that the Bush plan is simply a government handout to zealous investors who arguably had the biggest role in creating this mess. In theory, this is false. The government is not passing out welfare checks to the rich on Wall Street. Rather, it is buying up the most worthless assets on their books — assets no sane private individual would consider purchasing — for what will certainly be market value and without much hope of a return on the people’s investment. The idea is to pump capital, and hence confidence, back into the struggling financial sector. Whether it will work is beyond me.
Our current financial situation has precedents, and economists are becoming frustrated in their efforts to point this out to Washington. The International Monetary Fund recently released a study detailing the response to 42 banking crises in the past 30 years. The New York Times ran a story Sept. 28 detailing how the Scandinavians successfully handled theirs in the early 1990s. Proposals to keep the impact of a banking crisis to a minimum have ranged from letting the crisis run its course, buying toxic assets, providing credit, plainly giving the banks money or injecting stock into the failing institution. The Bush doctrine of buying toxic assets has proven to be more expensive and less reliable than plans used in other democratic countries — such as those in Scandinavia — which emphasized the method of injecting stock. This tactic importantly gives taxpayers at least a semblance of gain by obtaining actual equity in the troubled bank.
Those who think such a proposal would be ineffective and invite big government into the boardrooms of American banks — and would rather spend taxpayer money on junk mortgage-backed securities — should be encouraged to examine the empirical evidence.
America is not alone in this panic. Germany, Belgium, the United Kingdom, Ireland, France and the Netherlands are all coming to terms with their own credit collapse. All seem to be emphasizing the method of acquiring equity in return for essential recapitalization. Recently, Fortis was partially nationalized by the Benelux countries; Luxembourg, Belgium and France did the same for Dexia.
Of course, the United States experienced its own banking crisis — the Savings and Loans crisis — in the late 1980s and recovered at a cost of $160 billion to bail out overextended bankers. A bailout of the S&L and Bush type only encourages risky behavior by creating what experts call a ‘moral hazard’ — dubbed by the Wall Street Journal as “the distortions introduced by the prospect of having to pay for your sins.” By bailing out financial firms without making them hurt will simply encourage future generations of our noble elite to live like kings for the better part of a decade while having taxpayers split the bill.
Politically, this proposal was a brilliant move by Bush, Paulson and Bernake to pour even more money into Wall Street while leaving the American taxpayer to deal with the repercussions. The truth is that a terrible precedent was set when no one in Washington ever considered alternative ways to solve the crisis.
James Sonneman ([email protected]) is a senior majoring in political science and history.
