Washington, D.C., October 3, 2008—The Competitive Enterprise
Institute urges the House to vote against the Wall Street bailout bill.
Statement of Fred L. Smith, Jr., President of
The bailout bill that passed the Senate is no improvement over the bill the
House rightly rejected on Monday. Representatives should stick to their guns
and reject the bill for the following reasons:
- The bill perpetuates an unrealistic view of homeownership.
Ill-considered legislative and regulatory initiatives have turned the American
dream into the American nightmare for many people. Failing to reform the
political programs and pressures that triggered the current crisis merely sets
us up for the next crisis.
- The bill tries to relieve symptoms without addressing causes.
A lack of proper monitoring of the creative financial instruments that
have evolved in recent decades has resulted in “toxic” debts that are difficult
to identify and isolate. Monitoring processes must be improved to keep pace
with market innovations.
- The bill may worsen the effect of mark-to-market accounting, which
contrary to press reports has not been fixed by the SEC, by forcing banks to
"write down" the value of similar assets when the government purchases at a
discount. This loss in "regulatory capital" would decrease amounts banks could
lend, ironically leading to a further contraction in credit and thereby
worsening the very problem the bill hopes to alleviate.
- The bill risks far too much taxpayer money in a bailout that may not
work. If the Wall Street bailout plan fails, then there will be no one to
bail out taxpayers, who will be on the hook for up to $700 billion. And the
federal government will then be too weak fiscally to deal with an even worse
economic crisis. For that reason, the bill is riskier than doing nothing.
- The increase in the debt limit may lead indirectly to price hikes in
staples such as food and oil as investors expect the new debt to be "monetized"
through inflation. Speculators will likely hedge a falling currency by shifting
their money to commodities, creating higher consumer prices sooner rather than
- More government intervention in the market may well make things worse.
Interference by the federal government in market decisions is largely
responsible for the current lack of liquidity. More government interference may
compound rather than relieve the problem. As a recent IMF study concluded,
“Providing assistance to banks and their borrowers can be counterproductive,
resulting in increased losses to banks…[and] a deeper hole in the net worth of
banks, crippling tax burdens to finance bank bailouts, and even more severe
credit supply contraction and economic decline” than would otherwise
The risks of rushing this reckless bill through are immense because setting
off down the wrong path now could turn a big problem into a disaster. The House
should not be scared by cries of “Fire! Fire!” into gambling away $700 billion
of taxpayer money. The House owes it to the American people to take whatever
time and effort are necessary to determine the real nature of the current
liquidity problems and then to devise more effective solutions that do not
threaten to bankrupt the federal government and impoverish the next
CEI is a non-profit, non-partisan public policy group dedicated to the
principles of free enterprise and limited government. For more information about
CEI, please visit our website at www.cei.org