The Botched Big Bailout

Well it seems that the Big BailoutTM is getting harder and harder to pass Congress. I haven't been looking for the finer details, but I pretty much gather that the major problems are:
  • The nature of the bailout, which seems to be throwing money at banks and financial institutions rather than buying them out (which was the Swedish model).
  • The idea that bad behaviour should be rewarded.
  • The idea that the US government is engaging in the worst sort of "socialism for the rich".
  • The threat posed to public debt, which is already too high.
  • The belief that the market should simply run its course.
  • The fear that the bailout will have little or no impact on the problem.
  • The fear that the bailout grants too much power to the US Treasury.
There is a sizeable group of Republicans who are refusing to pass the bailout in its current form. Essentially the issue is one of trust - is Hank Paulson's bailout sufficient enough to solve the problem or not?

My personal opinion is that both sides of the argument have merit. The Democrats and Republicans who support the bailout are doing so because they truly fear the consequences of the current economic crisis. The Republicans opposing the bailout are doing so out of fear that the consequences of the bailout will outweigh the benefits.

This is not a time for partisanship, yet I don't think anyone is being too partisan here. It's not that I have confidence that Congress will make the decision (I don't), but, in this particular case, I am not questioning their motives. There is enough fear and doubt on both sides to make the decision hard to make.

So let me offer some level of solution, not that anyone will listen to me, of course.

I believe that some sort of bailout is needed. I'm not convinced that the Paulson plan is the best way to do it, which is why it is good that Congress is debating these measures. The best outcomes we can possibly hope for is for the money to give financial institutions some breathing space while the economy tanks and, eventually, recovers enough so that the billions used in the bailout get paid back over time. In other words, the bailout has to take resources from the future in order to secure the present.

The more I look at the Swedish solution, the better it looks. Rather than throwing money at the problem (which seems to be the Paulson plan), it would be better if the government bought out the struggling financial firms - in other words, nationalization. This would allow the institutions to keep running and providing (albeit limited) levels of credit without the threat of bankruptcy. Yet the nationalization will be temporary - lasting no more than ten years maximum. In that time the financial company is made leaner and meaner and then eventually unleashed back into the market when the Federal government fully privatizes it - with the proceeds from privatization paying back the debt accrued from the original buyout.

Moreover, I suggested earlier the importance of instituting some form of market capitalization tax as a means to pay back the debt as well. I am absolutely certain that the Swedish model I propose in the previous paragraph will NOT result in all of debt being paid off. Therefore another form of revenue should be instituted. I am loathe to suggest income tax rises since I believe that the people of America should be the last to directly pay tax to save Wall Street. A market capitalization tax (Market capitalization is when a listed company's share price is multiplied by the amount of shares) would be a broad-based tax upon all publicly owned companies that would help pay off the debt. In essence, future Wall Street profits would be taxed to pay for the present rescue - which is why I describe it as "taking resources from the future to secure the present".

I gotta tell you though that even with the best bailout there is nothing that will stop the US from going into a deep recession. As I have said in comments threads on other blogs, the best thing to do at the moment is for individuals to pay off debt and live within their means. Moreover, even with hundreds of billions of dollars (or even more) being hurled at the problem, US economic policy in the medium to long term should be focused upon the points I have reiterated before and yet again remind you:
  • Cut military spending
  • Raise taxes on the rich
  • Run a fiscal surplus to pay off debt
  • Use interest rates to keep inflation low
  • Re-regulate the financial industry to prevent such a crisis from occurring again
  • Fire Ben Bernanke
  • Create a universal health care system that will cut present health costs
I still think that a crash in the US dollar is likely and that the coming recession will probably end up rivalling the great depression - and I say this even if a bailout goes ahead. There is nothing anyone can do to reverse the problem, but there is plenty that can be done to limit any future damage.

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