Friday, October 03, 2008

Why the Bailout Won't Work

Joseph Stiglitz is a Nobel-Prize-winning economist at Columbia University. In the October, 2008 issue of The Economists' Voice, he has a short article--"We Aren't Done Yet: Comments on the Financial Crises and Bailout"--that summarizes some of the reasons why the bailout of Wall Street won't work. Other articles in this journal are helpful in providing clear analysis of the situation. Unfortunately, I doubt that anyone in Congress is reading such articles.

Stiglitz makes a number of points. The bad housing loans made in recent years were based on rising house prices. Those prices are going to continue to fall, and throwing money at Wall Street is not going to fill that hole. The American economy is contracting, and the economic slowdown will continue to create more financial problems. The bailout does noting to stop this contraction.

It is likely that the banks will want to pass on their lousiest loans to the American taxpayers. Henry Paulson says he will hire the best people from Wall Street to make sure this doesn't happen. But this assumes that these Wall Street people hired by the government will work for the public good and not for the good of Wall Street. How realistic is that? Moreover, we should keep in mind that the whole logic of this bailout is based on trust--we are being told we should trust the same people from Wall Street who got us into this mess to get us out of it!

Stiglitz concludes that it is highly unlikely that this bailout will work. And he remarks: "In environmental economics, there is a basic principle, called the polluter principle. It is a matter of both equity and efficiency. Wall Street has polluted our economy with toxic mortgages. It should now pay for the cleanup. How can Paulson oppose such a proposal?"

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