Opposing the Bailout

Crossposted at Right Minds

Back in September, Treasury Secretary Henry Paulson convinced Congress that he needed $700 billion in order to bail out failed mortgage giants Fannie Mae and Freddie Mac. Paulson promised to use the money to buy up troubled mortgages owned by the two companies, which would eliminate billions of dollars in liabilities for these corporations. Congress passed the bill, and then Paulson announced that he would use the money to buy stock in banks too. And also bail out AIG, and Bear Sterns too while he had the money. And American Express.

Now Congress is thinking of bailing out the Big Three automakers in order to rescue them from the consequences of years of mismanagement. And recently, the federal government has assured Citigroup that it will try to shore it up by injecting another twenty billion dollars into the company, in addition to the twenty-five billion it put into it a few weeks ago .

It’s a key tenet of Keynesian economics that raising taxes during a recession is very harmful, so it’s a mystery where Congress thinks it will find the money to pay for all these bailouts. The deficit was high enough before the bailout (around a half trillion); now, some estimates put the 2009 deficit at over a trillion dollars. Apparently, Congress has just given up on ever controlling the national debt, and will spend with absolutely no consideration for what its resources are.

Apart from the financing of the bailout, conservatives should oppose it on the grounds that it represents a massive and unwarranted government intrusion into the economy. (It might be a bit of an exaggeration to say an “unprecedented” intrusion into the economy—the saving and loans bailout, the Great Society, and the New Deal spring to mind—but it’s close). It should be quite unbelievable that a Republican president favors partially nationalizing financial institutions, or supports spending what will almost certainly be well over a trillion dollars at one go. The bailout represents George W. Bush’s final betrayal of conservatives.

Conservatives should (and for the most part, do) reject Paulson’s heavy-handed efforts. So should liberals. The implementation of the bailout is an unholy alliance between big business and big government—it combines the worst aspects of capitalism and socialism.

The bailout is, in essence, a massive insurance policy for corporations. It destroys the concept of moral hazard, that a firm that takes a gamble risks losing everything. In our current climate, any firm that is in any danger of bankruptcy needs only to ask the federal government for a spot of help, and it will be rescued at taxpayer expense. This arrangement is a blatant abuse of power by both business and government.

Defenders of the bailout claim that the companies being bailed out are “too big to fail,” and that their size and role in the economy make bailing them out less painful than not doing so. That was, possibly, true for Fannie and Freddie—they were massive corporations partly controlled by the government. But there can’t be many more—there is simply no possible way that American Express, GM, Citigroup, and AIG were all too big to fail.

Even if we accept that every company bailed out was, in fact, too big to fail (and if, say, GM, were to fail, the consequences would undoubtedly be horrible), the bailout would still be unjustified. If our economy is so fragile that over five crucial corporations can fail within three months, then any bailout is a Band-Aid on a gunshot wound. Injecting money into the system won’t address any of the underlying reason any of these corporations went under, and in most cases is only throwing good money after bad.