Bailout Band-Aids Will Only Prolong the Pain

by: Eric Schleien

Last weekend the Bush administration proposed a 700 billion dollar bailout of bad mortgage debt to unfreeze the credit markets in the United States. Some members of Congress even argue that this bailout is not big enough. Through all of the arguing between how big or small the bailout should be, the talk has been minimal in asking whether this bailout is necessary. Just because everyone is saying it is necessary doesn’t necessarily mean it’s true.

The fact of the matter is that the federal government does not have the money to buy up this debt. Instead, the government will take on debt to buy faulty mortgage debt. This bailout policy is putting more people on the line, not less, as a bailout may imply. To understand the bailout, one needs to look at the nuts and bolts of what goes on behind the scenes to make this plan go into effect.

As the United States is running up huge deficits and is heavy in debt, we don’t have hard cash to bail out faulty mortgage debt. In order to initiate the bailout, we will have to print money to bail out the firms. The printing of more money leads to an increase in the money supply; it's the same thing as printing credit and money out of thin air. Too much credit in the system without the proportional increase in real wealth was the cause of the problem in the first place and now we are trying to solve it by creating more credit and more money out of thin air. The answer to inflation is not more inflation.

There are many ways to solve our current economic problems. We need to balance our budget by simply living below our means, return to a sound monetary policy of low inflation and low borrowing rates, and lowering taxes.  This would make housing more affordable for more people and increase our standard of living. We would have temporary economic pain of a year or two but the alternative of this bailout is we could have economic pain for the next ten to thirty years, depending on how many band-aids they put on the system. These economic band-aids are propping up prices, which only prolong the pain.