Should the government be using taxpayer money to rescue Wall Street? The Denver Post asked two economic experts to weigh in on why a bailout is needed — and why it shouldn’t be done.
Washington is working on an agreement that would allow the federal government to make unprecedented purchases of the distressed assets of troubled financial institutions.
This would replace the policy followed for most of 2008 — a piecemeal response to the problems created by our 17-year debt binge of providing a rescue here, allowing a bankruptcy there.
The current financial situation has placed the Treasury and the Federal Reserve between the proverbial rock and hard place — moral hazard versus systemic risk. Wisely, they have opted to err on the side of avoiding the latter.
The danger with the asset-purchase plan is that it reinforces the perception that some institutions are too big to fail. But the risk to the system of doing nothing has become too enormous to ignore.
Ignoring the financial crisis was the approach chosen in 1930. Washington allowed the money supply to collapse by 29 percent as 9,000 banks failed and the lost liquidity was not replaced. Output fell by 29 percent, the stock market lost 90 percent of its value, and the unemployment rate soared to 25 percent.
The current plan is not about “bailing out” big financial institutions, an unfortunate pejorative term that provides a catchy, albeit misleading, headline or sound bite. It is about preventing a repeat of the 1930s and the unfathomable human misery that would create.
Is it a perfect plan? Of course not. We could debate endlessly how to tweak it. But it is more important to set aside partisan politics and adopt a plan that has some hope of calming financial markets.
A modern, industrial economy like ours depends on a smooth flow of credit — to finance small businesses; provide homeowners with reasonably priced mortgages; allow us to buy cars and pay our kids’ college tuition; build roads and hospitals; finance the huge capital expenditures that keep us competitive with the rest of the world, expenditures that provide new jobs and retain existing ones.
Inaction is unthinkable!
