1.Monetarism- Monetarism is the idea that a government should have a steady increase in the money supply at a rate that is approximately equal to the growth in the economy’s productivity. Expanding the money supply mainly allows for a natural growth of the economy and efficiently solves the problems of inflation, unemployment, and recession. Monetarism also emphasizes a free market economy.
2.Keynesianism- Keynesian economics is based of the ideas of John Keynes, an economist. Keynes believed in direct government intervention in the economy through the use of fiscal policy, which is when the government uses taxes and spending to control the economy. The government must create the right balance of supply and demand to stabilize the economy. If the economy was in a recession, the government would increase its spending and decrease taxes, which would increase the demand and pull the economy out of a recession. If the economy was experiencing to high of inflation, the government would decrease its spending and increase taxes in order to decrease the demand, which would balance the economy.
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3.Economic Planning- Economic Planning is the idea of the government setting price and wage controls to control the economy during inflation. In the case of a recession, the government would adopt an industrial policy where the government helps invest in basic industries and provides subsidies in order to pull the economy out of a recession.
4.Supply Side Economics- Supply Side economics says that the government should interfere in the economy less, and that tax reductions will increase the incentive to work. This will make the total tax income higher while total tax rates will decrease.
5.The Federal Reserve- The Federal Reserve regulates the supply of money in the country by changing the interest rates charged to banks and by buying and selling Federal Reserve securities. In a recession, the Federal Reserve will indirectly increase the money supply by lowering interest rates and buying Federal Reserve securities in order to have economic growth. If there is inflation, the Fed will try to decrease the money supply by increasing the interest rate and selling securities, which will decrease the inflation and control the economy. The Federal Reserve is usually pretty independent of the government and is comprised of the seven members of the board of governors, who are chosen by the president for 14 year, non-renewable terms. 6.The Executive Branch With Regards to Economic Policy Making- There are three important people within the executive branch that deal with economic affairs. The first is the chairman of the Council of Economic Advisors, Edward Lazear, who forecasts the economy. The second is the director of the Office of Management and Budget, Jim Nussle, who prepares the amount of spending that government agencies will partake in and also analyzes budget and spending patterns. The final person is the Secretary of the Treasury, Henry Paulson, who estimates revenue from existing tax laws and represents the US in its economic dealings with other nations. The secretary of the treasury us usually drawn from or close to the world of business. 7.The Budget- The budget is a document that details how much money the government will collect in taxes and spend in revenues and how these expenditures will be allocated to certain programs. 8.Taxes- Taxes are the government’s way of making money to pay for its spending. In 1913, the government passed the 16th amendment, which authorized a graduated income tax, making the rich pay more in taxes and the poor pay less. The tax burden of the US is lower than it is in most democratic nations. In the US, a fair tax law has generally been viewed as one that keeps the overall tax burden rather low, makes everyone pay something, but makes the richer pay more. 9.Deficit- A deficit occurs when the government spends more money then it makes in taxes. The current deficit of the US is $10,344,246,532,931, and it has been increasing at a rate of $3.45 billion per day since September of 2007. The deficit has been created because of government overspending. However, it is very hard to decrease the deficit because that would mean cutting government spending on things like childcare, crime control, military spending, etc. 10.Gross Domestic Product- Gross Domestic Product is the total market value of all final goods and services produced within the country in a given period of time. The GDP is one of the measures of national income and output for the United State’s economy. Last year, the Gross Domestic Product of the United States was 13.8 trillion dollars
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Type of Politics: client politics: The politics of policy-making in which a small group benefits and the public pays the costs.
The $700 billion bailout is an example of client politics. Although the bailout is supposed to help the nation’s economic crisis, only banking and investment firms will receive the benefits of tax-payer dollars. majoritarian politics: Secretary of Treasury Henry Paulson, Chairman of the Federal Reserve Ben Bernanke, President Bush and many politicians tried to sway the public into support of the bailout through economic majoritarian politics. They urged voters and their congressmen to pass the legislation in order to restore the health of the entire economy. But the bailout legislation was still opposed by a majority of voters because there was a perception that only a small group of Wall Street banking firms would benefit – not average citizens or even the nation’s economy. The public
demonstrated visible opposition to client politics.
What Interest groupd and/or elites are influencing the debate?
1) Investment firms
American International Group (AIG), Lehman Brothers and Goldman Sachs all hold mortgage backed securities
which they cannot trade because their value has either declined or has not been established due to unknown risk.
They would be immediate beneficiaries of the $700 billion bailout. There is a strong political connection between Wall Street investment firms and Secretary of Treasury Henry Paulson. Henry Paulson is a former CEO of Goldman Sachs, which stands to benefit greatly from the bailout. The Secretary of Treasury is usually hired from the business and financial community and gives the president a Wall Street point of view.
2) Mortgage Banks, Fannie Mae and Freddie Mac
Many financial institutions issued or bought subprime mortgages. These are mortgages made with adjustable
interest rates to unqualified borrowers (subprime). When interest rates on the mortgages went up, the borrowers could not repay the loans and went into foreclosure. Foreclosures are undesirable for banks because they end up with illiquid (non-cash) assets that cannot be sold easily in the present housing market. Banks end up with a pile of real estate, but no money to lend. While banks did engage in risky lending practices and are partially responsible for the present liquidity crisis, they want a government bailout to restore liquidity and positive values to their balance sheets.
3) Business community
Large corporations and small companies have relied heavily on credit to keep their businesses afloat.
Lines of credit are needed for auto loans, purchase of capital equipment, payroll and inventories. Without
credit, many businesses would either cut jobs or close their doors. Because business relies heavily on credit, the financial health of the nation could be jeopardized if it is unavailable. To prevent widespread failures, businesses and chambers of commerce lobbied Congress for bailout legislation to give liquidity (cash) to banks and get them lending money again.
4) Homeowners
Homeowners who defaulted on mortgages hoped that legislation would encourage banks to renegotiate interest rates on mortgages or even the revalue homes at current market prices, which are substantially lower than their purchase prices. The rationale for homeowners is that some may be able to stay in their homes rather than face foreclosure. Although the legislation cannot change the terms of a mortgage without the consent of the banking institution (unconstitutional) it can use loan guarantees to convince banks to modify the terms of distressed mortgages.
5) Municipalities
Municipalities have debt in the form of bond issues and pension obligations. But they also have shrinking revenues in the midst of the mortgage meltdown, as more houses are boarded up and go into foreclosure. Municipalities are looking for relief because they are laying off employees and cutting programs. The $700 billion bailout is seen as a way to help the failing housing market and relieve the credit crunch which limits the ability of municipalities to borrow money during the economic downturn.
In Congress, opponents of the bill included: populists (who advocate people over "the elite") and conservative Republicans (who oppose government intervention in the economy). In Congress, supporters of the bill included: fiscally conservative Democrats ("Blue Dogs"), who provided over 1/3 of the support in the Senate vote. Many Democrats in general initially called for reforms to the bailout plan, including more power to Congress and the elimination of golden parachutes. They were also wary of Bush's "Don't think, act fast" tactic (Iraq, anybody?). However, negotiations and revisions have now resulted in somewhat greater approval.
Summary of Bailout Plan
The Emergency Economic Stabilization Act of 2008, was enacted on October 3, is commonly referred to as the "bailout" of the U.S. banking system. It authorizes the Secretary of the Treasury to spend up to $700 billion to buy troubled assets, especially mortgage-backed investments, from the nation’s banks. The legislation was passed in response to a liquidity crisis in banks and investment firms, both in the United States and abroad, which was caused by defaults on subprime mortgages. Many American financial institutions hold a substantial amount of bad mortgage debt, and their solvency is now in question. By investing heavily in bad mortgages or mortgage derivatives, banks lowered their money reserves and have no way to recoup their losses in the near future. The failure of several large U.S. based financial institutions in September, 2008, including Lehman Brothers, Bear Stearns, Washington Mutual, Wachovia, and AIG, precipitated a market panic in which stock indexes worldwide dropped 40% ($8.3 trillion) from one year ago, and credit markets lost the ability to loan money. Frozen credit affected individuals who could no longer get a loan to buy a car or pay for college tuition, and businesses who could not borrow money to meet payrolls or buy inventory. Secretary of Treasury Henry Paulson feared the economy would be thrown into a deep recession and asked for the $700 billion to restore immediate cash-flow to the banking system, restore credit markets, and keep the economy afloat.
THE PRO
Summary
With the collapse of Lehman Brothers and the buyout of Merrill Lynch on September 15th, the country’s brewing economic crisis suddenly became the focus of American media and minds. Perhaps learning a thing or two from the Hoover administration of Black Friday, 80 years ago, Treasury Secretary Henry Paulson and Federal Reserve Chair Ben Bernanke pushed a solution: a rescue plan to buy up the bad mortgages and assets that were ruining Wall Street investment banks and America’s credit market. The price tag—$700 billion—has sent many a clueless American into protest. Honestly? Let’s get some perspective.
Contrary to criticism, the bailout plan is not a “blank check” to the Bush administration or to Wall Street from the average Joe (Plumber, Six-Pack, or otherwise). $700 billion is a maximum amount that will be spent at staggered intervals to purchase assets for an above-market value. The Treasury will be able to sell these assets again, thereby earning back some of that $700 billion. In fact, according to The New York Times, “the Treasury’s involvement in the crisis and the speed with which Congress is responding could generate long-range optimism and raise the value of mortgages.” Secondly, while indignant Americans point fingers at Wall Street greed and Bush’s economic policy, what they fail to realize is that recession influences everybody. Lawmakers are recognizing that the bailout bill is not only a savior to Wall Street, but also a necessary measure to prevent Main Street from suffering the repercussions of a tumbling economy. “Now is the time to come together, Democrats and Republicans, in the spirit of cooperation on behalf of the American people,” said Barack Obama. Both he and McCain voted in favor of the bill. (Associated Press)
Yes, $700 billion is a lot of money for a country already deep in debt. Yet think of it this way: according to estimates by the Congressional Budget Office, America owes $705 billion just in interest for the money it has borrowed to fight wars in Iraq and Afghanistan. ( USA Today) Frankly, when considered relatively, saving the financial system is one of our more useful investments of $700 billion. Face it: America’s deficit is astronomical, and scrimping on this bill is not going to make that much better. However, what it will do is allow the market to continue freefalling to the point where a later cure could be much more costly. On the other hand, following the theories of John Maynard Keynes, many economists believe that deficit spending is actually the answer to a recession because it pumps money into the economy.
When the House first voted down the bill, the Dow dropped 777 points—the largest single day drop in history. (CNN.com) Investors are afraid, and Americans are insecure. Should the government fail to instate some confidence into this situation, we may fall a long way before we hit bottom.
Charts
The collapse and mergers of Wall Street giants are destroying America's very much needed consumer confidence. In order to get spending up again, the government needs to inspire some faith in the market.
A survey by the Pew Research Center shows that 57% of the public believes the government is doing the right thing in investing billions to keep markets secure.
There are several reasons why the legislation is a poor solution to the financial difficulties. The plan for government to purchase mortgage backed securities is risky. The U.S. now risks falling into the same financial quagmire that brought insolvency to global financial institutions. The cost of the bailout would increase the budget deficit to roughly $1 trillion dollars in FY 2009 (Sasseen, "All this and Perhaps a Plunging Dollar Too" Business Week 6 Oct. 2008: 36). A trillion dollar deficit would be around 6% of our nation’s projected GDP (Saseen), but the increase in debt would further weaken the dollar and cause inflation. In order to fund deficits, the U.S. must borrow money from foreign credit markets, which may not be readily loaned due to our current weak financial condition. Raising interest rates on Treasury bills to lure more foreign buyers is not an option given that we are facing a recession and increased interest rates would deepen the financial problem by making loans more expensive for businesses and consumers. The legislation was a rush to a quick fix. Very few alternatives were considered. For example, low interest government money could have been loaned to banks, or any firm that had a liquidity problem.
The bailout has political implications as well. Treasury Secretary Henry Paulson wants to bail out Wall Street, but public confidence is not reassured when a obvious conflict of interest exists. Paulson, the ex-CEO of Goldman Sachs, has the authority to pick which investment firms will get the financial support of a government bailout. It is no surprise that Goldman Sachs has been helped while Lehman Brothers was allowed to fail. The plan also encourages interest groups to seek their share of the $700 billion handout. According to former Speaker of the House, Newt Gingrich, the legislation will lead to "crony capitalism and 20 years of political corruption, lobbying influence, and bureaucratic micro-management of the finance sector" ( "$700 Billion Bailout is Essentially Wrong" Transcript: On the Record with Greta Fox News Network, 22 Sept. 2008). Also, the government is willing to purchase bad assets at face value rather than current market value, which is something that no private sector investor has been willing to do. The implication is that the taxpayers are being fleeced while investment banks profit.
Many people also believe that the government bailout of financial institutions is a step towards socialism. With $250 billion of the $700 billion being used to purchase equity positions in banking institutions, the claim that banks are being nationalized has some merit. Many economists, in defense of capitalism, believe that there must be an inherent risk in investing. In an open letter to Congress on September 24, 2008, over one hundred university economists stated their belief that investors must bear the risks of failure http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm). Jacob Weisberg of Newsweek, recently wrote "there is a collectivization of losses and risk" which creates a new economic model which could be described as "modified capitalism" (Weisberg, "Name that Economy" Newsweek; 10/13/2008:34). The public’s lack of support for the legislation demonstrates not only skepticism in government’s ability to solve a complex economic crisis, but also a perception that the bailout is merely client politics – or rather, politics as usual.
Chart
ECONOMIC BAILOUT PLAN PASSED BY CONGRESS All Reps Dems Inds
Approve 31% 29% 38% 26%
Disapprove 51 49 46 57
Don’t know 18 22 16 17
THE ECONOMIC BAILOUT WILL HELP… Now Last week
Just Wall street 60% 54%
The whole country 30 39
Americans continue to think Wall Street is more likely to benefit from the government’s economic bailout than "Main Street," although those who approve of the economic plan say it will help homeowners across the country.
GOVERNMENT PROVIDING MONEY TO FINANCIAL INSTITUTIONS Now Last week
Approve 36% 43%
Disapprove 52% 43% In principle, Americans disapprove of the government providing money to financial institutions. Last week, they divided on this question. Source: CBS NEWS POLL For Release: Monday, October 6, 2008 6:30 pm (ET)
Source: The Heritage Foundation (heritage.org)
Article:
Parsing Mr. Paulson's Bailout Speech: The Unprecedented Giveaway of Financial Wealth
ECONOMIC POLICY
Top 10 Things You Should Know About Economics
The Four Economic Theories
1. Monetarism- Monetarism is the idea that a government should have a steady increase in the money supply at a rate that is approximately equal to the growth in the economy’s productivity. Expanding the money supply mainly allows for a natural growth of the economy and efficiently solves the problems of inflation, unemployment, and recession. Monetarism also emphasizes a free market economy.
2. Keynesianism- Keynesian economics is based of the ideas of John Keynes, an economist. Keynes believed in direct government intervention in the economy through the use of fiscal policy, which is when the government uses taxes and spending to control the economy. The government must create the right balance of supply and demand to stabilize the economy. If the economy was in a recession, the government would increase its spending and decrease taxes, which would increase the demand and pull the economy out of a recession. If the economy was experiencing to high of inflation, the government would decrease its spending and increase taxes in order to decrease the demand, which would balance the economy.
3. Economic Planning- Economic Planning is the idea of the government setting price and wage controls to control the economy during inflation. In the case of a recession, the government would adopt an industrial policy where the government helps invest in basic industries and provides subsidies in order to pull the economy out of a recession.
4. Supply Side Economics- Supply Side economics says that the government should interfere in the economy less, and that tax reductions will increase the incentive to work. This will make the total tax income higher while total tax rates will decrease.
5. The Federal Reserve- The Federal Reserve regulates the supply of money in the country by changing the interest rates charged to banks and by buying and selling Federal Reserve securities. In a recession, the Federal Reserve will indirectly increase the money supply by lowering interest rates and buying Federal Reserve securities in order to have economic growth. If there is inflation, the Fed will try to decrease the money supply by increasing the interest rate and selling securities, which will decrease the inflation and control the economy. The Federal Reserve is usually pretty independent of the government and is comprised of the seven members of the board of governors, who are chosen by the president for 14 year, non-renewable terms.
6. The Executive Branch With Regards to Economic Policy Making- There are three important people within the executive branch that deal with economic affairs. The first is the chairman of the Council of Economic Advisors, Edward Lazear, who forecasts the economy. The second is the director of the Office of Management and Budget, Jim Nussle, who prepares the amount of spending that government agencies will partake in and also analyzes budget and spending patterns. The final person is the Secretary of the Treasury, Henry Paulson, who estimates revenue from existing tax laws and represents the US in its economic dealings with other nations. The secretary of the treasury us usually drawn from or close to the world of business.
7. The Budget- The budget is a document that details how much money the government will collect in taxes and spend in revenues and how these expenditures will be allocated to certain programs.
8. Taxes- Taxes are the government’s way of making money to pay for its spending. In 1913, the government passed the 16th amendment, which authorized a graduated income tax, making the rich pay more in taxes and the poor pay less. The tax burden of the US is lower than it is in most democratic nations. In the US, a fair tax law has generally been viewed as one that keeps the overall tax burden rather low, makes everyone pay something, but makes the richer pay more.
9. Deficit- A deficit occurs when the government spends more money then it makes in taxes. The current deficit of the US is $10,344,246,532,931, and it has been increasing at a rate of $3.45 billion per day since September of 2007. The deficit has been created because of government overspending. However, it is very hard to decrease the deficit because that would mean cutting government spending on things like childcare, crime control, military spending, etc.
10. Gross Domestic Product- Gross Domestic Product is the total market value of all final goods and services produced within the country in a given period of time. The GDP is one of the measures of national income and output for the United State’s economy. Last year, the Gross Domestic Product of the United States was 13.8 trillion dollars
Type of Politics:
client politics: The politics of policy-making in which a small group benefits and the public pays the costs.
The $700 billion bailout is an example of client politics. Although the bailout is supposed to help the nation’s economic crisis, only banking and investment firms will receive the benefits of tax-payer dollars.
majoritarian politics: Secretary of Treasury Henry Paulson, Chairman of the Federal Reserve Ben Bernanke, President Bush and many politicians tried to sway the public into support of the bailout through economic majoritarian politics. They urged voters and their congressmen to pass the legislation in order to restore the health of the entire economy. But the bailout legislation was still opposed by a majority of voters because there was a perception that only a small group of Wall Street banking firms would benefit – not average citizens or even the nation’s economy. The public
demonstrated visible opposition to client politics.
What Interest groupd and/or elites are influencing the debate?
1) Investment firmsAmerican International Group (AIG), Lehman Brothers and Goldman Sachs all hold mortgage backed securities
which they cannot trade because their value has either declined or has not been established due to unknown risk.
They would be immediate beneficiaries of the $700 billion bailout. There is a strong political connection between Wall Street investment firms and Secretary of Treasury Henry Paulson. Henry Paulson is a former CEO of Goldman Sachs, which stands to benefit greatly from the bailout. The Secretary of Treasury is usually hired from the business and financial community and gives the president a Wall Street point of view.
2) Mortgage Banks, Fannie Mae and Freddie Mac
Many financial institutions issued or bought subprime mortgages. These are mortgages made with adjustable
interest rates to unqualified borrowers (subprime). When interest rates on the mortgages went up, the borrowers could not repay the loans and went into foreclosure. Foreclosures are undesirable for banks because they end up with illiquid (non-cash) assets that cannot be sold easily in the present housing market. Banks end up with a pile of real estate, but no money to lend. While banks did engage in risky lending practices and are partially responsible for the present liquidity crisis, they want a government bailout to restore liquidity and positive values to their balance sheets.
3) Business community
Large corporations and small companies have relied heavily on credit to keep their businesses afloat.
Lines of credit are needed for auto loans, purchase of capital equipment, payroll and inventories. Without
credit, many businesses would either cut jobs or close their doors. Because business relies heavily on credit, the financial health of the nation could be jeopardized if it is unavailable. To prevent widespread failures, businesses and chambers of commerce lobbied Congress for bailout legislation to give liquidity (cash) to banks and get them lending money again.
4) Homeowners
Homeowners who defaulted on mortgages hoped that legislation would encourage banks to renegotiate interest rates on mortgages or even the revalue homes at current market prices, which are substantially lower than their purchase prices. The rationale for homeowners is that some may be able to stay in their homes rather than face foreclosure. Although the legislation cannot change the terms of a mortgage without the consent of the banking institution (unconstitutional) it can use loan guarantees to convince banks to modify the terms of distressed mortgages.
5) Municipalities
Municipalities have debt in the form of bond issues and pension obligations. But they also have shrinking revenues in the midst of the mortgage meltdown, as more houses are boarded up and go into foreclosure. Municipalities are looking for relief because they are laying off employees and cutting programs. The $700 billion bailout is seen as a way to help the failing housing market and relieve the credit crunch which limits the ability of municipalities to borrow money during the economic downturn.
In Congress, opponents of the bill included: populists (who advocate people over "the elite") and conservative Republicans (who oppose government intervention in the economy).
In Congress, supporters of the bill included: fiscally conservative Democrats ("Blue Dogs"), who provided over 1/3 of the support in the Senate vote. Many Democrats in general initially called for reforms to the bailout plan, including more power to Congress and the elimination of golden parachutes. They were also wary of Bush's "Don't think, act fast" tactic (Iraq, anybody?). However, negotiations and revisions have now resulted in somewhat greater approval.
Summary of Bailout Plan
The Emergency Economic Stabilization Act of 2008, was enacted on October 3, is commonly referred to as the "bailout" of the U.S. banking system. It authorizes the Secretary of the Treasury to spend up to $700 billion to buy troubled assets, especially mortgage-backed investments, from the nation’s banks. The legislation was passed in response to a liquidity crisis in banks and investment firms, both in the United States and abroad, which was caused by defaults on subprime mortgages. Many American financial institutions hold a substantial amount of bad mortgage debt, and their solvency is now in question. By investing heavily in bad mortgages or mortgage derivatives, banks lowered their money reserves and have no way to recoup their losses in the near future. The failure of several large U.S. based financial institutions in September, 2008, including Lehman Brothers, Bear Stearns, Washington Mutual, Wachovia, and AIG, precipitated a market panic in which stock indexes worldwide dropped 40% ($8.3 trillion) from one year ago, and credit markets lost the ability to loan money. Frozen credit affected individuals who could no longer get a loan to buy a car or pay for college tuition, and businesses who could not borrow money to meet payrolls or buy inventory. Secretary of Treasury Henry Paulson feared the economy would be thrown into a deep recession and asked for the $700 billion to restore immediate cash-flow to the banking system, restore credit markets, and keep the economy afloat.
THE PRO
Summary
With the collapse of Lehman Brothers and the buyout of Merrill Lynch on September 15th, the country’s brewing economic crisis suddenly became the focus of American media and minds. Perhaps learning a thing or two from the Hoover administration of Black Friday, 80 years ago, Treasury Secretary Henry Paulson and Federal Reserve Chair Ben Bernanke pushed a solution: a rescue plan to buy up the bad mortgages and assets that were ruining Wall Street investment banks and America’s credit market. The price tag—$700 billion—has sent many a clueless American into protest. Honestly? Let’s get some perspective.
Contrary to criticism, the bailout plan is not a “blank check” to the Bush administration or to Wall Street from the average Joe (Plumber, Six-Pack, or otherwise). $700 billion is a maximum amount that will be spent at staggered intervals to purchase assets for an above-market value. The Treasury will be able to sell these assets again, thereby earning back some of that $700 billion. In fact, according to The New York Times, “the Treasury’s involvement in the crisis and the speed with which Congress is responding could generate long-range optimism and raise the value of mortgages.” Secondly, while indignant Americans point fingers at Wall Street greed and Bush’s economic policy, what they fail to realize is that recession influences everybody. Lawmakers are recognizing that the bailout bill is not only a savior to Wall Street, but also a necessary measure to prevent Main Street from suffering the repercussions of a tumbling economy. “Now is the time to come together, Democrats and Republicans, in the spirit of cooperation on behalf of the American people,” said Barack Obama. Both he and McCain voted in favor of the bill. (Associated Press)
Yes, $700 billion is a lot of money for a country already deep in debt. Yet think of it this way: according to estimates by the Congressional Budget Office, America owes $705 billion just in interest for the money it has borrowed to fight wars in Iraq and Afghanistan. ( USA Today) Frankly, when considered relatively, saving the financial system is one of our more useful investments of $700 billion. Face it: America’s deficit is astronomical, and scrimping on this bill is not going to make that much better. However, what it will do is allow the market to continue freefalling to the point where a later cure could be much more costly. On the other hand, following the theories of John Maynard Keynes, many economists believe that deficit spending is actually the answer to a recession because it pumps money into the economy.
When the House first voted down the bill, the Dow dropped 777 points—the largest single day drop in history. (CNN.com) Investors are afraid, and Americans are insecure. Should the government fail to instate some confidence into this situation, we may fall a long way before we hit bottom.
Charts
Source: The Wall Street Journal
Source: Pew Research Center
Article: While It's Big, Bad and Ugly, The Bailout Is the Only AnswerTHE CON
Summary
There are several reasons why the legislation is a poor solution to the financial difficulties. The plan for government to purchase mortgage backed securities is risky. The U.S. now risks falling into the same financial quagmire that brought insolvency to global financial institutions. The cost of the bailout would increase the budget deficit to roughly $1 trillion dollars in FY 2009 (Sasseen, "All this and Perhaps a Plunging Dollar Too" Business Week 6 Oct. 2008: 36). A trillion dollar deficit would be around 6% of our nation’s projected GDP (Saseen), but the increase in debt would further weaken the dollar and cause inflation. In order to fund deficits, the U.S. must borrow money from foreign credit markets, which may not be readily loaned due to our current weak financial condition. Raising interest rates on Treasury bills to lure more foreign buyers is not an option given that we are facing a recession and increased interest rates would deepen the financial problem by making loans more expensive for businesses and consumers. The legislation was a rush to a quick fix. Very few alternatives were considered. For example, low interest government money could have been loaned to banks, or any firm that had a liquidity problem.
The bailout has political implications as well. Treasury Secretary Henry Paulson wants to bail out Wall Street, but public confidence is not reassured when a obvious conflict of interest exists. Paulson, the ex-CEO of Goldman Sachs, has the authority to pick which investment firms will get the financial support of a government bailout. It is no surprise that Goldman Sachs has been helped while Lehman Brothers was allowed to fail. The plan also encourages interest groups to seek their share of the $700 billion handout. According to former Speaker of the House, Newt Gingrich, the legislation will lead to "crony capitalism and 20 years of political corruption, lobbying influence, and bureaucratic micro-management of the finance sector" ( "$700 Billion Bailout is Essentially Wrong" Transcript: On the Record with Greta Fox News Network, 22 Sept. 2008). Also, the government is willing to purchase bad assets at face value rather than current market value, which is something that no private sector investor has been willing to do. The implication is that the taxpayers are being fleeced while investment banks profit.
Many people also believe that the government bailout of financial institutions is a step towards socialism. With $250 billion of the $700 billion being used to purchase equity positions in banking institutions, the claim that banks are being nationalized has some merit. Many economists, in defense of capitalism, believe that there must be an inherent risk in investing. In an open letter to Congress on September 24, 2008, over one hundred university economists stated their belief that investors must bear the risks of failure http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm). Jacob Weisberg of Newsweek, recently wrote "there is a collectivization of losses and risk" which creates a new economic model which could be described as "modified capitalism" (Weisberg, "Name that Economy" Newsweek; 10/13/2008:34). The public’s lack of support for the legislation demonstrates not only skepticism in government’s ability to solve a complex economic crisis, but also a perception that the bailout is merely client politics – or rather, politics as usual.
Chart
ECONOMIC BAILOUT PLAN PASSED BY CONGRESSAll Reps Dems Inds
Approve 31% 29% 38% 26%
Disapprove 51 49 46 57
Don’t know 18 22 16 17
THE ECONOMIC BAILOUT WILL HELP…
Now Last week
Just Wall street 60% 54%
The whole country 30 39
Americans continue to think Wall Street is more likely to benefit from the government’s economic bailout than "Main Street," although those who approve of the economic plan say it will help homeowners across the country.
GOVERNMENT PROVIDING MONEY TO FINANCIAL INSTITUTIONS
Now Last week
Approve 36% 43%
Disapprove 52% 43%
In principle, Americans disapprove of the government providing money to financial institutions. Last week, they divided on this question.
Source:
CBS NEWS POLL
For Release: Monday, October 6, 2008
6:30 pm (ET)
Source: The Heritage Foundation (heritage.org)
Article:
Parsing Mr. Paulson's Bailout Speech: The Unprecedented Giveaway of Financial Wealth
http://www.globalresearch.ca/PrintArticle.php?articleId=10597