It appears that a fair number of my online penpals is cheering the failure of the bailout plan in Congress. I’ve been making rounds recording my disagreement with their point of view – and at some point, I realized that I need to state my opinion in my space as well.
The objections to the plan run mostly along the lines of “how can we spend so much of taxpayers’ money to let those who caused the whole mess off the hook?” I happen to think that that point of view is terribly misguided.
You know who is going to suffer the most if the current financial crisis keeps spiraling downwards? The middle class. Not the rich – they will simply become less rich, but stay rich nonetheless. Not the poor – please forgive me my inadvertent snobbery, but the poor have little to lose, by definition. The middle class, conversely, will lose a lot when the corporations and consumers tighten their belts and spend less and less. A florist will not be able to sell her stock of roses, a waiter will earn fewer tips, a fledgling online business will see fewer orders. Thousands of corporate soldiers will be out of jobs. Many will lose their houses. Some of them may deserve it, on account of buying houses they could never afford. The vast majority will be innocent bystanders.
The Great Depression destroyed a few financiers. It destroyed a lot more of Average Joes. The unemployment rate hit 25% then, and the number of mortgages in default swelled to 40%. We are nowhere near those numbers right now (6% and 4%, respectively), but we are sliding towards that. Shouldn’t we be trying to take some action?
The recovery in 1933 arguably jump-started with federal cash infusions via the Reconstruction Finance Corporation and the Home Owner’s Loan Corporation. In early nineties, the Resolution Trust Corporation dealt with S&L failures of the previous decade. Those were admittedly created years after the crises hit. But they provide a reasonably successful template. One that can be used now.
The plan would effectively transfer the burden of owning “troubled assets” from shareholders to taxpayers, and in the process deepen the budget deficit to somewhere above 6% of GDP. Yes, that is not fair to taxpayers, on the surface of it. But there is a fair chance that some of that money will be repaid (RTC did turn a modest profit even, didn’t it?). And what’s more important, the cost of after-the-fact unwinding of financial crises around the world in the last 30 years averaged 16% of GDP. Going with the Bernanke/Paulson proposal, in effect, should cost considerably less than sitting on our asses waiting for the natural bottom to hit in a few years. We do nothing – and we all suffer, some of us possibly losing everything in the process. We follow this plan – and there is a fair chance of stabilizing the economy to the point where other harsh decisions, regarding how to prevent this from happening again, can be made.
Update: And you know what, all of you who cite economists signing letters criticising the bailout? It’s all about whom you’d rather trust. Quoting Harward economist Greg Mankiw (emphasis mine),
Ben [Bernanke] is at least as smart as any of the economists who signed that letter or are complaining on blogs or editorial pages about the proposed policy. Moreover, Ben is far better informed than the critics. The Fed staff includes some of the best policy economists around. In his capacity as Fed chair, Ben understands the situation, as well as the pros, cons, and feasibility of the alternative policy options, better than any professor sitting alone in his office possibly could.
If I were a member of Congress, I would sit down with Ben, privately, to get his candid view. If he thinks this is the right thing to do, I would put my qualms aside and follow his advice.
P.S. Yes, I lost huge sums of money on the stock market in the last year-plus, even though I’m well-diversified with investments in what I would describe as “solid” companies. The bailout would benefit me in a very direct way. I’m mentioning this so no one doubts my motives.