How the Bailout is Polluting Our Financial Future

[Herb Schaffler]

How the bailout is polluting our financial future

[LINK POSTED BY MEMBER] Only Members Can View This No Hillary For President Forum Link. | October 2, 2008


When it comes to the bailout, the effects won’t be felt right away, but it will have a significant impact on the world tomorrow. The most tangible future loss is financial. Congress will have to take out a $700 billion loan from China (or other nation) that will increase our foreign financial dependency and saddle future generations with even more interest payments. The total cost then is sure to pass $1 trillion and this added debt will have unknown negative effects on our economy.
Another negative impact the bailout will have on our future is the message it sends to financial institutions. Economists call this concept “moral hazard” and in this case the notion can be summed up like this: What’s to stop financial institutions from taking big risks again in the future if they think they will just get bailed out if they fail?
If this bailout was the first time the government had taken this kind of action the argument might be different, but take a look at recent history. The federal government bailed out Chrysler in 1979, and this year they came back to ask for more, along with Ford and GM. When many airlines were facing bankruptcy in 2001 they came to the Congress on the grounds that their survival was in the best interests of the nation. And Wall Street has made the same argument today.
There is a pattern of government believing certain firms are “too big to fail” and this bailout only perpetuates that problem. Fannie Mae and Freddie Mac took big risks because they believed the government would cover their losses. They were right. The bailout does not encourage responsible investing; rather it encourages excessive risk taking. That is a moral hazard.
However, the largest impact the bailout will have on our future is the one that we cannot see. Bailing out Wall Street is not an investment in our future but a discouragement of innovation. The unseen losses are in the opportunities to create value that the bailout takes away. The bailout prevents new, innovative ideas in the financial industry from emerging.
When carmakers threatened the horse drawn carriage industry, the makers of buggy whips switched to seat belts. When computers replaced typewriters and eliminated the jobs of typing staff in offices and newspapers nationwide, we didn’t panic. Instead, the information technology industry was formed, with more jobs and better pay than ever before. We can know that several more financial institutions would fail if no bailout passes. What we don’t know is what could rise from their ashes.
The bailout is pollution for our financial future. And most people know it. The frustrating part is that members of Congress are accepting the pollution on the grounds of efficiency. There will be no innovation to rise from Wall Street’s ashes because no one is willing to accept ashes. There is no willingness to sacrifice for the future.
Today’s leaders, John McCain and Barack Obama, are both way off this message, and unwilling to accept any sense of financial pain to promote a better future.
Unfortunately, Congress would sooner drag our nation into debt, keeping alive firms that gambled away their futures, than go through even three to six months of negative GDP growth and a temporary freeze in the credit markets.
No pain, no gain.
[LINK POSTED BY MEMBER] Only Members Can View This No Hillary For President Forum Link. is a research associate at the Reason Foundation. He blogs at [LINK POSTED BY MEMBER] Only Members Can View This No Hillary For President Forum Link. , where an earlier version of this has appeared.