As is evidenced by the large pickup in traffic that we are seeing to my videos series on the subprime financial crisis
, there is a lot of interest in what is happening right now with the economy, how we got to where we are, and what is happening with the government bailout plan. With this in mind, I thought it would be good to try and get an updated discussion going on the topic that we can all learn and benefit from. Below you will find a brief overview of what I feel are the core arguments for the bailout plan and against.
The basic argument behind the proposed government bailout, is that the financial crisis which financial firms around the world have been embroiled in for over a year now, is now rapidly spreading to main street, and affecting companies and consumers who had nothing to due with the investments which are at the heart of the problem. This side of the argument goes that if things are allowed to continue as they currently are, without some sort of intervention, then the problems which have until recently been confined to the financial institutions which have made these bad investments, will rapidly spread throughout the entire economy. The Bush administration's basic argument is therefore that because this is going to have a large affect on the average person who had nothing to do with the problem, that the government needs to intervene and lesson the blow to the individual taxpayer.
Their argument basically comes down to them feeling that if nothing is done, the cost to the US economy and therefore the average taxpayer will be much larger than the cost of the $700 Billion plan they have put forth. A second point that they seem to want to make sure that the taxpayer understands, is that the $700 Billion will be used to purchase assets which the government plans to hold for a period of time and then sell in the open market as confidence hopefully returns as a result of them doing so. With this in mind, the ultimate cost of the plan is not $700 Billion, but whatever the government is able to recoup from the sale of those assets, which some are saying could actually return a profit.
For a good concise overview of the Bush administrations stance on the issue, here is an interview with Secretary of Treasury Henry Paulson:
The basic argument against the bailout, is that the problems we are currently experiencing are a result of bad investments and too much reliance on borrowed money. The fact that the price of the assets at the center of the problem are going down, is the markets way of trying to purge these assets from the system. So the argument here goes that by having the government intervene, you are not letting the market do its job. By not letting the market do its job they argue that we are simply propping up a failed system and turning what would be a painful year or two, into potentially a decade or more of economic stagnation.
The second point that people on this side of the argument give, is that ultimately the government will not increase taxes or reduce government spending in other areas to pay for this bailout. The argument here goes that instead what will happen is the federal reserve will increase the money supply to continue funding the large government deficit that this is helping to create, which will ultimately result in inflation and a devaluation of the US Dollar.
Below is an interview with a vocal opponent of the bailout plan Peter Schiff, where he lays out this side of the argument:
This post is obviously a very surface level overview of the debate, which is meant to simply start a conversation of the different views on this. If you have a view point here, or if there is something you don't understand and would like more information on, please post your comments below as I would love to hear people's thoughts on this.
Other Links on the Bailout Debate
Automakers: Bailout Arguments, Pro and Con - Seeking Alpha
Big Three Bankruptcy: For and Against - Economix Blog - NYTimes.com
Question That: Bush/Paulson Bailout: For & Against