Fed Chairman Ben Bernanke has made a compelling case that the economy and the financial markets are in grave danger without a massive government bailout.
But will the bailout erase that danger?
“Just because they buy these assets, that doesn’t mean the economy is going to come back and people are going buy houses again,” said R. Brian Wen zinger, a partner and portfolio manager at Center City, Pa., money manager Aronson, Johnson & Ortiz LP.
Some economists and other experts are skeptical of the bailout because it does not address the root problem of mortgage foreclosures, sets the stage for bigger bailouts in the future and may have consequences no one has imagined yet.
Moreover, they said, there is no certainty the bailout plan being negotiated in Washington this week will have the desired effect of giving banks the capacity to make more loans, because accounting rules will force many of them into the difficult position of needing to raise capital to stay in business.
And there is no guarantee they will get the money.
Critics were out in force Wednesday, arguing that the Wall Street bailout should be extended to homeowners facing foreclosure.
“The root of it isn’t in the banks. It’s in the housing market,” said Robert Borosage, co-director of Campaign for America’s Future, a liberal group in Washington. “If you’re going to address the symptoms and not the cause, how do you prevent the cause from creating more symptoms?”
For some economists, the scariest thing about the proposed bailout without a drastic re-regulation of the financial system is the message being sent: The government will step in to clean up any mess created by poor risk management.
Doing so gives the impression that government will continue to step in, encouraging excess risk. This is known in financial jargon as “moral hazard.”
The bailout “will create the mother of all moral hazards,” said Robert Brusca of New York consulting firm Fact & ap Economics, an economist on Wall Street since 1977, “and you will never be able to regulate them enough to get rid of it.”
For now, though, because Wall Street firms botched risk management during the housing boom, Bernanke and Treasury Secretary Henry Paulson have formed their own two-person risk-management committee, convinced it could hold off imminent disaster.
Joseph R. Mason, a former U.S. Treasury Department economist and a senior fellow at the University of Pennsylvania’s Wharton School, said those fears were overblown.
