Bailouts Unconstitutional Failures

Jacob Sullum’s recent column argues that Bush’s auto bailout plan is an unconstitutional violation of separation of powers.  We earlier argued that it was either illegal or unconstitutional

Meanwhile, the Federal Reserve, with little public awareness, is attempting a financial system bailout far bigger than Congress ever authorized, resulting in one failure after another, as economics professor Jeffrey Rogers Hummel explains in a recent editorial.  “All the emergency initiatives of both the Fed and the Treasury since the subprime problem first emerged have not merely proved stellar and consistent failures. As Anna Schwartz . . . and other economists have suggested, the thrashing about of Fed and Treasury policy has undoubtedly made the financial situation worse.”

Professor Hummel describes how an unhinged Federal Reserve has “opened the monetary floodgates,” to the point where “Federal Reserve Bank credit [has] doubled to around $1.8 trillion.”  That massive  “increase of the monetary base . . . heralds future inflation.”  And the Fed is using money from the Treasury to buy up risky securities, putting the taxpayers at great risk:  

“Essentially, the Treasury is now issuing extra securities to borrow money from the economy, then loaning the money to the Fed in these special deposits so that Bernanke can re-inject it to make his bailout purchases of various securities, all without increasing the monetary base. In other words, what the infamous bailout act permitted the Treasury to do directly is something it had already started doing indirectly through the Fed to the tune of half a trillion. All in the name of easing a tight Treasury market.

This means that the total bailout is not the $700 billion that Congress appropriated, but at least $1.2 trillion. And that figure doesn’t include the Fed’s mid-October promise of $540 billion to bail out money market funds, which if not covered by the Fed’s sale of other assets, will require either further monetary increases or further Treasury borrowing. Thus we now have the worst of both worlds: a massive bailout financed both by Treasury borrowing (in order to avoid inflation) and a Federal Reserve increase of the monetary base (which heralds future inflation anyway).

Of the $1.2 trillion increase in federal government borrowing, at least half took place within the space of a month. This sudden 25 percent increase in the outstanding national debt qualifies as the most dramatic peacetime experiment in fiscal stimulus the U.S. government has ever implemented. If Keynesian theory were correct, the economy should have been well beyond the reach of any potential recession by the end of October. But how many economists are going to acknowledge this striking empirical refutation of the fiscal policy they hold dear?

This enormous increase in government debt may at least partly explain the sudden stock market collapse after the bailout passed.”

The Fed’s increasingly radical bailout measures have been described by sympathetic journalists as “creative.”  That polite euphemism disguises the fact that many of the Fed’s bailout measures have been illegal and lacking in any statutory authorization.  Federal Reserve Chairman Ben Bernanke should be removed from office for usurping powers not granted to the Fed by any federal law. 

Even recent Fed actions that are perfectly legal — like its unprecedented cut in the federal funds rate to virtually zero — are likely to be completely ineffective in reviving the economy, even as they discourage responsibility and thrift.

The Treasury Department, meanwhile, is using financial system bailout money for purposes Congress never intended, like buying up ownership shares in banks, leading even some former supporters of the bailout to protest that they were deceived by the Bush Administration.