Argument: US economic crisis is not that bad; $700b plan over-adjusts

Issue Report: $700 billion US economic bailout


Larry Elder. “Failure To Be Real Capitalists Caused Crisis” Investors Business Daily. 25 Sept. 2008 – “We are experiencing “the greatest financial crisis since the Great Depression”!

Even if this were true, we aren’t even close to that catastrophic event. At the Great Depression’s nadir, 25% of adults were unemployed, including nearly 50% of urban black adults. Economist David Wheelock of the Federal Reserve Bank of St. Louis says that by the dawn of 1934, nearly half the urban homes with mortgages were in default, and 7.3% of housing structures had been foreclosed. Today, 6.4% of mortgages are delinquent, 2.75% are in the foreclosure process, and 0.6% of all housing units are bank-owned.

But what about since the Great Depression? Take the recession of 1980-81. In 1980, inflation averaged 13.58%, unemployment increased from 6.3 to 8.5%, and the prime loan rate reached an astonishing 21.5%. According to the Mortgage Bankers Association, today’s delinquency rate is only a little higher than in 1985. And in 1999, the foreclosure rate set records.

According to the FDIC, in the almost two-year period of 2007 and 2008, 15 banks have failed. Similarly, during Clinton’s last two years in office, 1999 and 2000, 15 banks failed. In the recession-free years of 1988 and 1989, there were 1,004 bank failures. And since the Depression, the average number of yearly bank failures has been 94.

Sung Won Sohn, an economist at California State University, Channel Islands. – “If we don’t get the Paulson plan, there will be some pain and suffering, but I don’t think it will be the end of the world. We have gone through tough times before, but we have a resilient economy and we will rebound…This is a totally different situation than the Great Depression. Back then the government was the main contributor to the problem by raising taxes to balance the budget and allowing the money supply to contract by one-third.”[1]

Daniel Mitchell. “Bailout Would Impose Needless Economic Damage”. Real Clear Politics. 1 Oct. 2008 – Proponents of a bailout also are trying to rattle credit markets by arguing that inaction will cripple commercial and household lending. Fortunately, there is little evidence of a freeze in credit markets, thought the Administration’s rash rhetoric and the specter of a bailout doubtlessly are causing needless uncertainty and temporarily higher interest rates. Once the issue is resolved, one way or the other, credit markets will resume normal operations. The only question is whether capital allocation will be distorted – and long-run growth hindered – by government intervention.

Jeffrey A. Miron. “Commentary: Bankruptcy, not bailout, is the right answer”. CNN. 29 Sept. 2008 – Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.

Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.