Libertarian Party of Connecticut

Banker Bailout Only Prolongs the Agony

By Marc Guttman

Published in The New London Day on 10/19/2008

The silver lining in this banker-bailout financial mess is that more Americans now fully realize that some citizens use government power to fleece the rest of us. All it took was asking the American people for $700 billion to be delivered to Wall Street speculators. The bad news is that our representatives believe we will allow these ruses to continue. Despite an overwhelming majority of people opposing the bailout, Congress has just delivered our money to purchase other citizens' liabilities. Instead of allowing mismanaged businesses to take responsibility for their lending actions, they rewarded them with a handout.

In addition, the money is likely to be either printed out of thin air, thus devaluing all of our current wealth in U.S. dollars, or borrowed, putting us in even greater debt.

”Greed caused this current financial mess!” While this may be true, greed and ill-intent rarely can do great damage without access to great, collective power. It appears that the wayward monetary policy of the Federal Reserve Bank and intrusions into transactions between private persons by the federal government both played significant roles in developing the housing bubble, its inevitable bust, and this recession.

Economist Jeffrey Miron at Harvard University explains,:

”The current mess would never have occurred in the absence of ill-conceived federal policies ... Beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie (Mae)/Freddie (Mac) to expand subprime lending (to make it easier for people to purchase homes.) The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared ... This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle. Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.”

U.S. Rep. Ron Paul, R-Texas, and the economists at the Ludwig von Mises Institute have warned of the ill-affects of the Fed's monetary policy and market manipulations for decades. They make a strong case that by inflating the dollar and artificially lowering interest rates, the Fed distorted the true value of properties.

Now, these economists warn us of the bad times to come because of Congress's misguided rescue attempts. Though the pain for some well-connected banks might be delayed in this way, we cannot escape this problem. We can only make ourselves poorer.

Paul warns, “We risk committing the same errors that prolonged the misery of the Great Depression, namely keeping prices from falling. Instead of allowing overvalued financial assets to take a hit and trade on the market at a more realistic value, the government seeks to purchase overvalued or worthless assets and hold them in the unrealistic hope that at some point in the next few decades, someone might be willing to purchase them ... As with many other government proposals, the opportunity cost of this bailout goes unmentioned. (The) $700 billion tied up in illiquid assets is $700 billion that is not put to productive use. That amount of money in the private sector could be used to research new technologies, start small businesses that create thousands of jobs, or upgrade vital infrastructure.”

Thus, this corporate welfare is not only unfair, but is unlikely to allow for an economic recovery as promised. It will more likely worsen our downturn.

No matter how much the government pays for mortgage assets, it cannot raise the value of properties. The more the government impedes the market from self-correcting, the more likely it is that more of us will suffer.

Marc Guttman Is An Emergency Physician And Vice Chairman Of The Libertarian Party Of Connecticut. He Lives In East Lyme. He Is The Libertarian Candidate For State Senate In District 20. His Web Site Is Www.whyliberty.com.