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The Spectator
The Economic Crisis: Why Bail Out a Broken System?
by Sam Gomez '10As Congress returns on Thursday from a two day break for Rosh Hashanah, Americans across the nation will have to face the looming financial crisis. Economists and Federal Reserve officials warned last week that if the proposed $700 billion dollar bailout package that was being rushed through its various committees was defeated, the U.S. would face an imminent economic crash.
Well, the bill was not passed in the House; as a result on Monday the Dow Jones Industrial Average plummeted 778 points, the biggest single-day loss in history. Investors frantically tried to pull out of what they believed could be a new stock market crash. Black Monday, however, would only be the beginning, or so Federal Reserve officials and Wall Street affiliated legislators would have you believe.
The fact of the matter is this: for eight years now we have been facing less and less economic regulation in all sectors, including the securities and lending industries. The sudden financial crisis of the last two weeks was not sudden at all; millions of Americans have been slipping deeper into debt due to adjustable rate lending and credit card debt for years. The laissez faire attitude that favors an unregulated and unbridled free market has once again proven to be disastrous. Because of shoddy lending practices and a belief that US markets have the potential for limitless growth, many of the major investment banks and lending institutions have allowed their assets to include billions in "virtual money," or money that only exists in digital debts and accrued interest. We have already spent hundreds of billions of dollars trying to save financial institutions from collapse, and according to the Secretary of the Treasury Henry Paulson, "More is needed."
The problem was illustrated by Democratic Congressman Jim Marshall in a recent article he wrote on his position on the $700 billion dollar bailout: "Some politicians -- and a few economists -- would say that America is drunk on credit and just needs to go cold turkey. But it's more accurate to say we're addicted to credit. Too much credit. Good credit, bad credit, anything that lets us live the high life. We have mistaken growth in the value of financial paper for real economic growth."
The implications of this problem for average Americans have been clear for some time now. Housing prices around the country have been dropping in the past two years, and the lending market is becoming distorted. Instead of improving regulation and Congressional oversight of lending practices-- practices that have proven themselves as vital to the strength of the US economy-- legislators have consistently chosen to ignore the fundamental problems and instead pass legislation that bails out financial companies (see Bear Stearns, AIG etc.), rewarding them for their unsafe and reckless practices over the last few years.
If this bailout package was passed by Congress and signed into law, we would be perpetuating what is essentially a broken system. The scramble to get this legislation passed is also a negative. It is common sense that a hastily constructed plan is not structurally sound. As Marilyn Musgrave, Republican Congresswoman, and hardcore conservative, said, "We didn't get into this mess in 72 hours and we won't get out of it in 72 hours."
By agreeing to take on this debt today, the US leadership would be saddling future generations with the debt of current Wall Street fat cats. We would be propping up a house of cards with hundreds of billions of dollars simply so that a few in the top 10 percent of wealthiest Americans can continue to operate as the heads of mammoth banks and financial institutions. They would call this "providing liquidity" but it essentially would be infusing Wall Street with so much capital that it will continue to function as if there are no underlying problems. This market crash is simply what those with the most political capital and the biggest armies of lobbyists are afraid of. There is no way to prevent the inevitable collapse. The only responsible choice that we, as a nation, can make is to let free markets be free, and allow them to hit rock bottom if need be. The subsequent restructuring will be stronger, better, and more egalitarian.
I am not trying to say that a lack of action on the part of Congress would be good for the American people. This financial crisis will have wide-reaching implications for all Americans. We are already in a recession, and unemployment has been steadily climbing all year. Because of the events of the last week, there is essentially a credit freeze. It is almost impossible to get a loan for a car or a house. As many have noticed, their 401ks and IRAs have been hit hard by the downturn in many key markets. The legislature should focus on the individuals who John McCain called the "fundamentals of the American economy," when crafting a bill designed to keep the economy from grinding to a halt. Normal folks should be subsidized by government funds. However, the answer is not simply to pump more money into the system that has created this problem. This would further distort the markets that have led to this crisis. What is needed is a fundamental change in how the government deals with these financial problems. Increase in oversight and regulation, establishment of transparency and credibility in the sphere of financial regulation, as well as concerted efforts by the government to spend in key sectors of the economy will be the answer to this long and deep recession.
In the 1930s, FDR's New Deal established an alphabet soup of various governmental organizations with the sole aim of promoting American prosperity. A similar regime of programs aimed towards providing green and alternative energies to the American people is an imperative in the next 10 to 15 years if the global climate crisis is to be averted.
Instead of spending billions to take on bad loans, the US government should be focused on pumping those billions into the base of the American economy while building a green and sustainable future for all Americans. Make sure that your representatives know your views on these important issues and, most importantly, make sure that the candidate you vote for in November has a clear and concrete plan to steer the country through the Scylla and Charybdis of global economic meltdown and the climate crisis. This is the challenge of our time, and quite possibly the most important time in the history of the country.
The question remains, will we simply saddle future generations with the debts and environmental sins of our time? Or will now be the time that Americans stand up and clean up all of the messes, financial and ecological, of the 20th century?