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Political Physics: The Bitter Bailout Quandry


A blogumn by Monique King-Viehland

Bail Out Plan – Good, Bad or Ugly, Part II?

As I mentioned last week, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (aka “the bailout bill”).  The 451-page law authorizes the United States Secretary of the Treasury to spend up to $700 billion to purchase distressed assets, especially mortgage-backed securities, from the nation’s banks.  Supporters of the plan argued that unprecedented market intervention was critical to prevent further erosion of confidence in the credit markets and that failure to act could have lead to an economic depression.  However, opponents objected to the massive cost of the plan, the speed with which the bill passed and claimed that better alternatives were not considered.

So, I asked you all what you thought about the bailout bill?  Here’s what you said:  80% of you felt that the bail out bill was a bad idea; 64% of you felt that the bail out bill would not have an impact on the economy and 100% of you felt that it was not worth the $700 billion bucks.

Okay, you all are too smart and my job here is done, right?  Well, since less than 20 people would probably not be considered a representative sample by most statisticians, I guess I should actually tell you what I think and back it up with some additional data to help bolster your very smart opinions.

The goal of the bailout bill was to jumpstart the frozen credit market by basically buying up devalued mortgages thereby freeing up cash for struggling financial institutions.   Interestingly enough, several economists agree with you (and me).  In an open letter to Congress sent on September 24th, over 100 university economists expressed great concern over the proposed plan.   The letter was endorsed by 231 economists from American universities and described three “fatal pitfalls” of the proposal: (1) Fairness, (2) Ambiguity, and (3) Long-term effects.

In terms of fairness, the economists argued that the plan was basically a subsidy to investors that was being provided using taxpayer dollars.  In addition, they believe that the plan was ambiguous as it creates a new federal agency whose mission and oversight are not clearly spelled out in the bill.  Lastly, it has far reaching long term implications on the historically strong American private capital market that could be eroded by the new regulations and oversight.

But that’s not all.   According to JP Morgan & Chase estimates, the $700 million plan will cost the average American family about $2,300 – think of it approximately 100 million families paying more than $2,000 a piece, and yet many of them will never see a direct or indirect benefit of this plan.  Folks will continue to lose their homes, retirement funds will continue to dwindle, gas prices will continue to rise and even with the bailout bill the economy will not see an uptick today, or tomorrow, or anytime in the near future.

Our political leaders – on both side of the aisle – are in such a rush to solve this financial crisis that rhyme and reason have gone out of the window in lieu of quick action (it is a very important election year).  The bail out bill is not the panacea, in fact it is a dangerous gamble that will not cure our economic woes overnight and could possibly hurt us even more in the long run.