A Necessary Bailout

Posted Sept. 26, 2008, at 9:13 p.m.
Last modified March 20, 2011, at 3:24 a.m.

The strong public opposition to the proposed $700 billion government bailout of the country’s financial markets is understandable. With a ballooning deficit, largely due to the war in Iraq and tax cuts, concerns about where the bailout money will come from remain unanswered. In addition, no one wants to see private companies profit from their mistakes, especially when average citizens are financially stressed and no one has offered them financial support.

At the same time, a further weakening of the U.S. economy — which is certain without a rescue plan for Wall Street and still possible with it — would harm working-class families. More jobs would be cut, retirement savings would further erode and mortgages and other loans would be harder to secure.

President Bush lamely tried to make this case in his televised address Wednesday night and a quick televised speech Friday morning. The message, however, has not been heard by much of the public, and more important, by Republicans in Congress who continue to object to his $700 billion bailout plan.

“The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal,” the president said Wednesday.

He is right, but he has failed to sell his plan to a skeptical public and jittery market.

Thursday’s collapse of Washington Mutual, the largest bank failure in U.S. history, further highlights the urgent need for a comprehensive response to the financial crisis. The Seattle-based bank was heavily weighed down with risky mortgages and credit card debt, and concerned customers began withdrawing money, further weakening the bank.

The government seized the bank and quickly sold it to JPMorgan Chase for nearly $2 billion. That company will now assume WaMu’s big losses rather than having them fall to the federal government.

Private companies and wealthy individuals (financier Warren Buffett sunk $5 billion of his fortune into faltering Goldman Sachs this week) can help, but they don’t have the resources needed to shore up the entire American financial system. As the president said, only the federal government does.

That does not mean that a bailout should not come without conditions, and that is what Congress now is negotiating. Lawmakers must not lose sight of their goal, however. Their first priority is to inject needed money into the economy so that financial transactions — the buying and selling of debt — can restart. They can do this by providing a portion of the $700 billion the administration has asked for and closely monitoring the results. Decisions on restrictions on CEO salaries and perks and new or revised regulations can come later.

Several congressional leaders have suggested an initial infusion of $150 billion with required reporting and assessment of how much this helped. This is a reasonable approach.

A major concern of lawmakers is that taxpayers are protected. Such debate is largely rhetorical, says University of Maine finance professor Bob Strong. The assets of even failed banks and investment firms still have value. That value will be recouped when the assets are ultimately sold and the proceeds will go to the government, he said.

Lawmakers are right to be cautious, but they must make final a rescue package this weekend to avert further financial trouble.

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