The world is currently in shock over the rejection of the bail-out plan by Congress. Most people were confident of the passage of the bill and indeed, the world markets were poised on Monday in the anticipation that the bill would be passed. Yet, when the news broke on Monday, the result was heavily disappointing. Congress had elected to reject the $700 bn bail out plan for the financial sector. Almost immediately, the Dow tanked a record 7% or more than 770 points. When compared to the Great Depression, this is nothing. On Black Tuesday, stocks took a dive of more than 89%. However, the question that angers and bewilders almost all economists...is why?
The authors of Freakonomics, Stephen Dubner and Steven Levitt, have a blog that is highly interesting. In it they suggest that the reason, might actually be self-serving politicians (shock to me as well). The vote was close ending in a 228-205 defeat. Nate Silver's analysis on 38 candidates with tight re-election races shows that out of the 38, 30 voted against the bill. Odd that those without highly politicized races would be split almost 50-50 197(for)-198(against). Out of the 26 congressmen who are not running for re-election, 22 voted for the bill.
Explanation of the Bill
Why would the congressmen vote this way? Because the general populace of America are short-sighted. They see their tax-dollars going to finance this financial bail-out, have never heard of such a big amount of money before and only see that this money is being shipped out of sight. Since "out of sight" means the "financial sector" and not into their pockets, they cry "Thief". Now, this is completely understandable for those who have the same reaction. When you're wondering why the government was worried about the collapse of premiere chocolate maker, Fannie Mae, economists won't fault you for your opinion.
What they don't understand is without the bailout plan, what you have is the meltdown of the financial markets and that this means a choke for the national economy. This means no capital for investments, loans that are nearly impossible to get and high interest rates. It also means, as was shown in the market, that stocks in directly related sectors will take an immediate plunge followed most likely by a ripple effect in nearby sectors. So, in short, now with the rejection of the bail-out plan, sure you keep tax-payer dollars intact, but tax-payers lose a lot more in the long run as economic growth halts and recovery is hard because of the lack of money for investments.
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6 comments:
Well, Joey,
I think there's a very good reason why the congressmen didn't vote for the bill. Because the bill is the equivalent of Socialism for the Rich and Naked Capitalism for the Poor.
The root of this economic crisis goes back to the lower-middle income families who got swindled into ballooning interest rate mortgages by loan-sharking banks. Their families have been put out onto the street by foreclosures and their property values are going through the floor. Why should take out a huge amount of money on our Bank of China credit card and leave a huge debt for our children to bail out the Wall Street fatcats when we have real families in need of a so-called bailout? The whole situation screams injustice.
The capitalists love it when a poor family gets put out on the street. They say that'll teach you to make wiser financial decisions, and to do otherwise would incentivize bad behavior. So why should we be incentivizing their bad investments and overly risky maneuvers. If they win, they get to make lots of money. But if they lose, why should they take our money???
I'd agree Ktao if that's where it ended. Problem is, if we decide to teach these financial institutions a lesson, we suffer as well. Essentially what we'll have is a recession, big losses in stock markets, and losses in retirement funds. So, we can "teach them a lesson" and suffer the lesson with them, or rescue the field, have leverage upon the financial field and have the leading economists make new changes to it at a smaller cost to ourselves. I heard, but do not completely understand how, the 700bn dollars will not cost taxpayers that same amount. So essentially, it's impact will be smaller than that on each of us. If anybody knows more, lemme know.
I don't think it will cost taxpayers less than that amount of money. We're essentially buying the rafters off of a sinking sheet. We're buying worthless scraps of paper. How is that ever going to increase in value? We could be buying new textbooks for failing schools, or hiring better teachers, or setting up a better healthcare system with that money!
i dunno man, when i'm on the boat i don't think i really care =P
Hey check out this article for why they shouldn't have passed the bail-out:
http://www.time.com/time/business/article/0,8599,1845209,00.html?cnn=yes
Also, for a funny video on the subprime mortgage crisis:
http://blog.mises.org/archives/008655.asp
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