Marquette students should celebrate the government-funded bailouts of Fannie Mae, Freddie Mac, and lately AIG. The bold and forceful action of Treasury Secretary Hank Paulson, acting as economic czar for the Bush administration, allows our parents to keep giving us money for a little while longer.
I will not deny that the ham-fisted policies of the Bush administration got the United States into this mess. But, as the Berenstein Bears said, “It’s never too late to correct a mistake.” The consequences of doing nothing – millions of students unable to repay their loans, scores of banks unable to redeem depositors’ withdrawals – can never be underestimated.
The more interesting question before financial markets is not “Why?” but “What next?” Economics students understand the concept of moral hazard. Fannie and Freddie last week and AIG this week got so big that the government had to bail them out or risk chaos. But the expectation of being bailed out if the water got too hot encouraged firms’ executives to place risky bets that failed shareholders and the public interest writ large. How the incoming Obama or McCain administration deals with the moral hazard topic will be one of their sternest economic policy tests. Stabilizing the plummeting value of the dollar in international currency markets is not far behind.
It runs counter to the Warrior’s core principles to have the federal government owning major lending and insurance companies, except in desperate moments when a ripple effect of failure could infect the global financial infrastructure, wiping out hard-working Americans’ life savings. Now that Uncle Sam has taken a heavy burden onto his shoulders, we need to demand transparent federal procedures for the rehabilitation of wounded and bankrupted firms. Paul Volcker, a former chairman of the Federal Reserve, has suggested a second Resolution Trust Corporation (the agency that un-raveled the Savings and Loan crisis of the late 1980s). Volcker’s plan is wise even though it raises the question, “Who will regulate the regulators?”
Philosophical speculations on these questions are necessary and important in the long term. Now, though, is time to act quickly.
The intricacies of financial markets may not touch the day-to-day lives of most Marquette students, but a financial panic leading into a systemic depression would certainly hurt all of us in the MU community. Prompt action by the federal government has averted this horror. As Halloween draws near, we hope that the horrors before us are limited to the make-believe world.
Popularity: 8% [?]
