For Immediate Release. October 6, 2008 — On Wednesday, October 1, 2008, the Senate passed by a 74 to 25 vote (To view how your senators voted: 00213 ) the Emergency Economic Stabilization Act of 2008 (H.R.1424 [To view: Full text of legislation). The House of Representatives next passed the measure by a 263-171 vote (To view how your representative voted: 681 ) on October 3, 2008. And soon after its passage the bill was signed into law by President George W. Bush. The $700 billion legislation gives Treasury Secretary Henry M. Paulson Jr. the authority to purchase toxic mortgage-backed securities.
“Virtually unlimited power for the entire economy has been given to the Treasury Secretary. Such actions have never occurred in the history of this nation and will ultimately lead to crony capitalism and corruption,” said Dr. Joel P. Rutkowski, president of the American Voice Institute of Public Policy.
Foreign financial dependency will saddle generations to come with even more interest payments as America will have to borrow $700 billion from Communist China or other nations. The negative effects on this nation's economy will be substantial as the total cost will no doubt surpass $1 trillion dollars.
The message Washington has sent by passing this bailout plan is that it is all right to take big risks because the government believes certain firms are “two big to fail” and the government will be there to bail them out.
The process of failure is crucial to the success of the free market. Yet the Treasury Department and Federal Reserve continue to ignore this. In a capitalistic system, failure is what tells the market which strategies work and which do not since high risk firms are always trying out new and untested ideas. Furthermore, it is an indispensable corrective mechanism that moves capital from enterprises with failing strategies to those with successful strategies.
The measure, as well as previous actions by the Treasury Department and Federal Reserve have repeatedly short-circuited this mechanism. The government wants to avoid the unpleasant consequences when the market sends the message that too many bad loans have been made and a correction by a contraction in the amount of available credit is needed. Instead, the Federal Reserve artificially reduced interest rates and loosened up credit when it needed to be tightened. As expected, these actions still resulted in the bad investments to go bad and did not change the underlying facts. The government still tried to avoid letting the market face the facts as the market sent the message that some firms have become over-extended and no longer solvent. Avoiding reality and by orchestrating a series of government-bailouts the Treasury Department and the Federal Reserve falsely believes it can change the course of the coming events.
Treasury Department bureaucrats have deceived Americans and Washington legislators that voted for the bailout in Congress that they know how to make a profit on sub-prime mortgage loans that the best Wall Street investment banks could not. And now they are squandering taxpayers' dollars on investment securities whose proper market value is unknown and transforms the United States (U.S.) Treasury into a $1 trillion dollar hedge fund. If this were not bad enough, the bailout plan is loaded with $1.7 billion of pork-barrel spending. Furthermore, the legislation provides hundreds of billions of dollars of bailouts to foreign investors that includes Communist China. To purchase foreign financial institutions' assets that have a presence in the United States, the law permits taxpayers' dollars to be used. Furthermore, the decisions regarding U.S. financial markets are no longer being made in the U.S. but by foreign governments and investors. Several weeks ago, Japanese and Chinese investors including the governments of both nations pressured the U.S. government to take over Fannie Mae and Freddie Mac. The threat was that if the Feds did not stand firmly behind Fannie Mae and Freddie Mac, foreign government money from so-called sovereign wealth funds would no longer be used to purchase their bonds.
Congress fell for Treasury Secretary Henry M. Paulson Jr.‘s deception to purchase troubled assets with taxpayers' money that left the government stuck with these troubled assets. It is unsound business practice to throw good money after bad because bad debt rarely becomes good debt. Americans should not be surprised when the Treasury asks for additional amounts of financing and lawmakers approve it because they will feel the pressure to provide more funding because so much is already invested in the bailout. In fact, after the President signed into law the bailout plan, the credit markets signaled to Washington it was not enough.
Proponents of this legislation have cried falsely that the economy would collapse, banks would fail, retirement savings would disappear, no more credit would flow to the economy, and jobs would continue to be lost. However, remarkably resilient is the U.S. economy which so far since August 2007 has continued to grow though at a slower rate of 2 percent annually in 2008. Also, in 2008, credit to the economy has continued to grow at a high rate of 9 percent. Compared to other times in the history of this nation, the U.S. banking system has never been so flush with liquidity. In fact, into the banking system Federal Reserve Chairman Ben S. Bernanke has already injected over $630 billion of liquidity prior to the bailout plan approval by Congress. And not all of the U.S. economy is a speculative economy; for example, continuing to have access to credit at very low interest rates are the non-speculative components such as agriculture, industry and services.
“The bailout plan will produce financial chaos for many years to come. It does not address the current economic and financial problems facing this nation's economy and will only worsen the macro-economic imbalances. The actions of Washington for exchanging worthless assets for hard-earned American taxpayer dollars will have an extreme cost to the American economy of hyperinflation that will exacerbate food and energy price inflation and cause real incomes to erode. This would be further compounded if Democrat Presidential candidate US Senator of Illinois Barack Obama is elected because he has proposed more than $1 trillion in new spending. The $700 billion bailout is not enough to rescue a $15 trillion dollar banking system. This nation could have recovered from the current financial turmoil without spending this enormous amount of the taxpayers' dollars by using a market-based approach,” said Dr. Joel Rutkowski.
Joel P. Rutkowski, P.h.D.
President, The American Voice Institute Of Public Policy
to the American Voice Institute of Public Policy Home Page