What Should Uncle Sam Do?
Although the use of taxpayer money is regrettable, the novel and aggressive policies that the Federal Reserve has pursued during these fragile economic times have been necessary to maintain financial stability. Certainly [Ben] Bernanke didn't foresee the extent of the credit crisis, but he has acted forcefully since last August to open the discount window to troubled institutions, expand domestic and international lending facilities, and rescue Bear Stearns. These policies have quieted the financial markets and have brought both a significant reduction in short-term rates for borrowers and a reduction in default spreads.
Government bailouts are not without their downside. Promises of bailouts may encourage firms to take excessive risks (what economists call "moral hazard") if they know the government will come to the rescue. That is why the Fed must enact stringent capital requirements, as they do for banks, for any firm for which it provides a safety net.
But moral hazard should not stand in the way of aggressive policy. When the government established deposit insurance in the 1930s, many worried that such legislation would lead to excessive risk-taking by banks. Yet many economists now name deposit insurance as one of the most important economic reforms of the past century.
What the Fed learned from its failure to bail out banks during the Great Depression has kept the financial system intact and the economy functioning during this historic meltdown in the real-estate market. Had the Fed not intervened forcefully, it is quite likely that we would have seen a downward spiral of market prices and economic activity that could have rivaled the 1930s.
No One Is 'Too Big to Fail'
John Snow , former Treasury secretary under George W. Bush, now chairman of Cerberus Capital Management
The current turmoil results from excessive risk-taking and imprudent lending based on the assumption that housing prices would rise indefinitely. We now have a long-overdue correction. Government's proper role is to provide for an orderly adjustment while allowing the underlying market forces to work. Although it is painful and disruptive, the sooner it is resolved, the less injurious the spillover to the rest of the economy will be.
Society benefits when financial institutions take prudent risks. But when they are imprudent, for markets to work institutions must be allowed to fail. We allow banks to fail—witness IndyMac—but there is an orderly system overseen by a strong regulator.
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Member Comments
Posted By: melbee1971 @ 09/19/2008 10:26:28 AM
Comment: As a public high school teacher, the current state of our public (and private) institutions reflect our values as a society, from my point of view. I ask all readers to consider this comparison of the following American institutions: Wall Street, Financial Powerhouses, and our public schools...
We are bailing out these failing institutions with taxpayer dollars. The state of our public school system continues to decline. Bailouts and deregulation and more money for failing financial (private) institutions. But increased regulation and LACK of financial support for our PUBLIC SCHOOLS - does this tell us something about our overall priorities as a nation? Are we reaping what our leaders have sown for us?
Think about this, voters PLEASE! Not just for the sake of your own personal interests, but for the sake of our country.
Good teachers are being laid off and class sizes are growing. No child left behind is a law that requires improvements without the promised funding to implement these improvements. And our schools are listed as "failing schools" losing support from the federal government who "regulated" the schools in the first place.
What is left in our public schools is often a stressed out skeleton staff that does not have the resources to properly educate our students, our future, which we would hope will lead us someday.
More evidence is proving that No Child Left Behind (an unfunded mandate) has actually lead to increasing drop outs of our high school students. PLEASE don't blame the teachers for this. We don't want any child to fail. We are working as hard as we can. We are not "in it for the money."
Meanwhile, these corporate lobbyists have effectively secured deregulation and what they consider "optimal" conditions for their financial success (deregulation). And a few well-connected people have lined their pockets with enormous amounts of other peoples' money.
This sort of short-term gain at the expense of long-term growth way of thinking have really infected our entire way of running our society.
Unfortunately middle and lower class young people (the MAJORITY) of our future do not have the money or the resources to hire corporate lobbyists. Their teachers and their schools have very limited resources. And there is little to NO organized efforts to effectively support the reform and progress to lead our public schools to educate and prepare our future.
In every other developed and developing country we compare our students' progress with, there is a clear and dedicated effort to improve, fund, and prioritize education. We are and will be competing with these nations. In America, we are starving our schools while bailing out reckless fat cats who've thrived on greed. Is this the American Way? Or have we lost our way?
Let this be a lesson. Hopefully (as we say in class) we will learn from all of this and use it to improve, grow, and succeed.
Posted By: samser @ 08/05/2008 3:20:48 AM
Comment: In my opinion, (1) top executives for the duration of the bailout should not receive more than $500,000 annual compensation, and they should be obliged to stay on the job for a minimum of 3 years, until the mess they created is solved, if they fail to stay to solve the problem they should be penalized with a minimum of $1,000,000 fine, and (2) the government (The People) must get 10 percent of their current outstanding shares, as compensation for the risk being taken.
Sam Serr
Toronto, Ontario (Canada)
Posted By: samser @ 08/05/2008 3:18:51 AM
Comment: In my opinion, (1) top executives for the duration of the bailout should not receive more than $500,000 annual compensation, and they should be obliged to stay on the job for a minimum of 3 years, until the mess they created is solved, if they fail to stay to solve the problem they should be penalized with a minimum of $1,000,000 fine, and (2) the government (The People) must get 10 percent of their current outstanding shares, as compensation for the risk being taken.
Sam Serr
Toronto, Ontario (Canada)