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CEI President Issues Statement on the Bailout

Statement of Fred L. Smith, Jr., President of CEI: 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 later.
  • 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 occur.
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 generation. For more commentary on the bailout, visit cei.org/bailoutwatch.