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September 22, 2008

Can we downsize the Big Bailout?

Quote of the Day:
“It’s a rather brief bill, with lots of money.”
— Senator Chris Dodd

Subject: Can we downsize the Big Bailout?

Today’s message is a complex one. It’s pretty clear to us that few politicians understand the financial crisis before us — particularly their role in creating it. But I have confidence in the ability of DC Downsizers to understand what we write here.

So what about Treasury Secretary Paulson’s Big Bailout Plan . . .

Here’s some “good” news: The legislation authorizing the Big Bailout of U.S. financial institutions in only 3 pages long. This means that every member of Congress is likely to read it, even though the “Read the Bills Act” isn’t yet the law of the land.

Here’s some really bad news: The bailout legislation is only 3 pages long, meaning that all the details are going to be left to the unelected bureaucrats in the Treasury Department. This is the kind of thing our “Write the Laws Act” was designed to avoid.

Here’s some more bad news: The 3-page bill is likely to grow longer as members of Congress rush to stuff it with special projects.

Here’s even more bad news: The bill will raise the federal debt limit from $10.6 trillion to $11.3 trillion, and authorize the Treasury Secretary to buy distressed assets to the tune of $700 billion. This will be the largest expansion of government, and increase in the national debt, in the shortest amount of time, in the history of the country.

Here’s some “good” news: The authorization for the Treasury Secretary to buy distressed assets will only last two years, but . . .

That’s also bad news, because politicians and lobbyists will then have two years to wrangle sweetheart deals for themselves.

Here’s more “good” news. Many “experts” believe the federal government will be able to turn a profit on this deal, much as happened with the Savings & Loan liquidations in the 80s and 90s. But that’s also bad news, because . . .

If this can be done at a profit then why does it need to be done by the government at all? Why couldn’t the bad assets be liquidated through the normal bankruptcy process?

One answer, of course, is that other companies could fail too as the firms currently in trouble start to no-pay or slow-pay their bills under the bankruptcy process. But wouldn’t such failures be good for the economy going forward, as firms change their behavior to reduce risk, thereby making a future repeat of this episode less likely?

Those who favor the bailout argue that they’re trying to avoid panic, which could destroy companies that are perfectly sound. Unfortunately, the last time the federal government intervened in such a major way to prevent panic the pain lasted for 12 long years. It was called the Great Depression. Prior to that . . .

Financial contractions had been short and sharp. Prices, wages, and employment fell quickly to clear the market and then things started moving forward again. The federal interventions of the 1930s prevented the market from clearing and thereby preserved the misery for more than a decade. On the other hand . . .

Those who favor intervention can point to the S&L liquidation of the 80s and 90s, which did not result in a prolonged contraction. This is probably the strongest argument for the current proposal. Therefore, those of us who favor smaller, limited government must be prepared to deal with it. One counter argument is that the government is using your money to bail out the fat cats, but . . .

This argument is no longer as strong as it once was. Many more Americans own both stock and real estate than was the case during the Great Depression, or even during the S & L crisis. Many of us are also dependent on private pension funds that are in turn dependent on both the stock and real estate markets. An argument can be made that most of us are being bailed out, not just the fat cats. But this contention also overlooks one crucial point . . .

We’re all going to pay the price for bailing ourselves out. We can either pay the price through asset devaluation or through increased government spending. Either way, the price is going to be paid. There is no such thing as a free lunch. An argument can be made that the price could be higher or lower if we simply let these companies fail, or if the bailout proceeds, but the fact is . . .

The bailout is very, very likely to happen, and to happen quickly. We need to find a way to react to that.

But we also need to be proactive.


The two key words here are react and proactive. First of all, how should we react to the bailout?

We think you should oppose it, on general principles, and to make the politicians both nervous and cautious about how they proceed, especially in terms of manipulating the bailout to reward friends and punish enemies. You can use our general campaign to cut federal spending for this purpose. Use your personal comments to tell Congress you oppose the bailout. You can send that message using our easy-to-use Educate the Powerful System.

Second, we need to be proactive in terms of how the bailout is handled. The Democrats in Congress say they want to adjust the bailout bill to make sure the taxpayers benefit if the bailout turns a profit in the same way the S&L liquidation did. This sounds good. The problem is that for Democratic politicians having the “taxpayer benefit” is often code for giving Congress more money to spend to supposedly benefit the taxpayer. We need to make sure that . . .

Proceeds from the asset liquidation are used first to retire the debt the government assumes to fund the liquidation, and that any net profits from the sale of these assets is used either to reduce taxes, or rebate taxes to YOU.

You can use our general cut taxes campaign for this purpose. Use your personal comments to ask for the provisions in the above paragraph. You can send that message using our free Educate the Powerful System.

Finally, I said we need to be proactive — that we need to chart a course to make sure this current crisis doesn’t happen again. We need to start campaigning to end of all of the various means by which the federal government creates asset bubbles, including but not limited to the Federal Reserve.

This is going to be a major undertaking. We hope we will have your continued support to make it happen. You can contribute to our work at our website.

Or you can print out the form at that same link, and mail a check to the address listed there.

Thank you for all you do as part of the growing Downsize DC Army.

Jim Babka
President, Inc.

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