If enacted, the financial bailout bill will result in the biggest step toward socialism — and largest transfer of wealth — in American history.
Taxpayers will bail out hedge funds, financial firms and holders of mortgage-backed securities owned by affluent investors, who made bad bets on mortgage loans and real estate. Debt and money czars (Treasury Secretary Henry) Paulson and (Fed Chairman Ben) Bernanke say the economy will implode if the bill is not hastily passed. Yet, the economy is not in recession, the stock market closed Monday down 7 to 9 percent, and there are no bank runs.
In fact, real gross domestic product growth is at 2.8 percent. There is no impending crisis and no Great Depression on the horizon if Congress does not pass the bill. And if we were to go into a recession, would the czars then want to bail out every ailing company, buy up corporate debt and hand out financial assistance to every bankrupt company?
Efficient capital markets steer capital away from money-losing firms and toward profitable ones that better transform resources into higher valued outputs that increase living standards. The bill does not aid capital markets, and instead prevents their efficient operation.
Taxpayer money should not be used to subsidize mortgage lenders making loans that may not be paid back. Those firms should go out of business. Privatizing gains and socializing losses is a recipe for inefficiency.
Under the bill defeated Monday, government would have ended up owning millions of mortgages with Americans writing mortgage checks to the federal government. In exchange for taking troubled assets from financial firms and funds, government will acquire huge equity and debt stakes across the financial sector.
Managing firms and deciding on how to allocate capital should be left to private markets, not government bureaucrats. Taxpayers should not be held accountable for the bad bets of money lenders and borrowers.
Furthermore, the $700 billion price tag is enormous. To cover the bill, the United States will need to greatly increase the national debt by selling Treasury securities or printing money.
Instead of staving off a nonexistent financial crisis, this bailout could do the opposite by signaling inflationary expectations leading to the dollar’s further depreciation, a higher risk of a real financial crisis with a sudden collapse of the dollar as foreigners dump Treasuries, a spike in interest rates and higher commodity prices. The bill would have damaged the economy instead of protecting it.
Joseph Pomykala is a professor in the Towson University Department of Economics.
