Reason Foundation

http://reason.org
http://reason.org/news/show/economy-in-the-balance

Reason Foundation

Reason.com

Economy in the Balance

How the bailout is polluting our financial future

Anthony Randazzo
October 2, 2008

In his first book, Earth in the Balance, Al Gore appealed to the world to think beyond the present and look to the future. In today’s financial crisis, we should take his advice. Acknowledging political realities, the former vice president turned eco-crusader said, "One reason many world leaders have difficulty responding to the environmental crisis is that the worst of the predicted effects seems decades away." When it comes to global warming, the effects aren’t necessarily felt right now, but the things we do today have a significant impact on the world tomorrow.

When it comes to the bailout, the effects won’t be felt right away, but it will have a significant impact on the world tomorrow. The most tangible future loss is financial. Congress will have to take out a $700 billion loan from China (or other nation) that will increase our foreign financial dependency and saddle future generations with even more interest payments. The total cost then is sure to pass $1 trillion and this added debt will have unknown negative effects on our economy.

Another negative impact the bailout will have on our future is the message it sends to financial institutions. Economists call this concept "moral hazard" and in this case the notion can be summed up like this: What’s to stop financial institutions from taking big risks again in the future if they think they will just get bailed out if they fail?

If this bailout was the first time the government had taken this kind of action the argument might be different, but take a look at recent history. The federal government bailed out Chrysler in 1979, and this year they came back to ask for more, along with Ford and GM. When many airlines were facing bankruptcy in 2001 they came to the Congress on the grounds that their survival was in the best interests of the nation. And Wall Street has made the same argument today.

There is a pattern of government believing certain firms are "too big to fail" and this bailout only perpetuates that problem. Fannie Mae and Freddie Mac took big risks because they believed the government would cover their losses. They were right. The bailout does not encourage responsible investing; rather it encourages excessive risk taking. That is a moral hazard.

However, the largest impact the bailout will have on our future is the one that we cannot see. Bailing out Wall Street is not an investment in our future but a discouragement of innovation. The unseen losses are in the opportunities to create value that the bailout takes away. The bailout prevents new, innovative ideas in the financial industry from emerging.

When carmakers threatened the horse drawn carriage industry, the makers of buggy whips switched to seat belts. When computers replaced typewriters and eliminated the jobs of typing staff in offices and newspapers nationwide, we didn’t panic. Instead, the information technology industry was formed, with more jobs and better pay than ever before. We can know that several more financial institutions would fail if no bailout passes. What we don’t know is what could rise from their ashes.

Having a long-term perspective and acute understanding of the unseen effects of our actions are principles every environmentalist has adopted. Those same principles reveal the most destructive aspects of the bailout. They are principles that allow us to look past the surface of today and accept that we have a future to protect too.

What Al Gore and green policy pundits have also accepted is the need for sacrifices to preserve our future. Firms need to invest in energy-saving technology and cut back on emissions—even if there is a cost today. Individual lifestyles need to be adjusted, whether or not there is a cost savings. Pollution, no matter how efficient it is to allow it today, will destroy us tomorrow.

The bailout is pollution for our financial future. And most people know it. The frustrating part is that members of Congress are accepting the pollution on the grounds of efficiency. There will be no innovation to rise from Wall Street’s ashes because no one is willing to accept ashes. There is no willingness to sacrifice for the future.

In 1979, President Carter, facing an energy crisis and stagflation, acknowledged that in the short-term there was simply no way to avoid sacrifice to save the nation. Carter, for all his faults and failures as a president, took the step of asking the American people to take ownership in their nation—and failed. Today’s leaders, John McCain and Barack Obama, are both way off this message, and unwilling to accept any sense of financial pain to promote a better future.

Al Gore notes in Earth in the Balance that world leaders struggle with accepting pain for gain because it usually means death and suffering. In the case of the bailouts that is exactly the choice, some financial firm death and market suffering. Unfortunately, Congress would sooner drag our nation into debt, keeping alive firms that gambled away their futures, than go through even three to six months of negative GDP growth and a temporary freeze in the credit markets.

No pain, no gain.


Anthony Randazzo is Director of Economic Research


Print This