Various financial institutions are in big trouble because they lent lots of money to people who they had little reason to think could pay it back. These mortgages were packaged as securities. The companies that invested heavily in them are now dropping like flies.
Now the government, led by Treasury Secretary Hank Paulson, has proposed a seven-hundred billion dollar ($700,000,000,000) bailout for whichever financial firms he feels like saving. This follows bailouts for Bear Stearns, IndyMac Bank, AIG, and the big three automakers.
Where would the money come from? The government may try to borrow more money, if there's anyone left willing to lend to it. Or it may just print more money through the Federal Reserve. Either way, it's the taxpayers who will really pay for this, whether through higher spending for interest on the national debt, or reduced value of the dollar.
Hence the first argument. It is immoral to take money from some people by force and give it to others. It's theft. Making this theft even more obnoxious is the fact that the recipients of stolen money would be politically-connected Wall Street millionaires.
Second, this plan would reward failure. This is wrong in and of itself.
Third, the bailout is unconstitutional. The Constitution does not give the federal government the authority to do this. The Founding Fathers knew what they were doing, and Congress would we well-advised to follow the rules they put in place.
But the bailout's promoters make other arguments. Isn't the bailout, despite its obnoxious nature, necessary to save the economy? Isn't it necessary to prevent a recession or worse?
No. This plan will make things worse. At best, it might delay the consequences a little, but they would be worse. The bad debt needs to be liquidated, not pushed onto taxpayers. There will be a correction, perhaps a recession. As painful as this is, it is necessary to restore health to the economy, just as surgery is sometimes necessary to restore health to the human body.
Won't some innocent people get hurt in a correction? Yes. But the whole point of a bailout is to hurt innocent taxpayers.
Fourth, the bailout is guaranteed to make things worse over the long run. The principle of incentives says that if you reward something, you will get more of it. Thus if you reward bad lending and bankruptcy, you will get more bad lending and bankruptcy. Guaranteed. This principle is as certain as anything we know about human behavior.
If you start bailing out companies, there will always be more bailouts. In a free market, you must be free to fail, so that resources can be directed to more efficient uses.
Fifth, even if you assume that government action could save the economy, that doesn't mean that it would. Treasury Secretary Hank Paulson, who is not even a Republican and has donated to democrats, has a long history of wrong predictions about the economy.
The plan would devote 700 billion to Paulson's discretion alone. From his proposed plan:
“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”Americans overwhelmingly oppose the bailout. They must demand that it be stopped.