By Grant Reid | A lesson lurks under a massive pile of debt.
The last time the government insisted the nation must take wide-ranging action with minimal debate, a war began in Iraq. Over $600 billion later, that decisive action has yet to achieve its desired result.
As the credit markets froze and banks began to fail, politicians began to stress the need to act without delay, once again. The eventual outcomes of the bailout are also far from certain, mostly because the true costs and merits of the bill were never fully debated. Although Congress has already passed the $700 billion bailout, Americans should continue thinking critically about the bill’s outcomes. If they do so, they will reluctantly realize that the bailout’s success, despite its billing, is far from assured and merely delays a necessary fiscal reckoning.
The great conceit of modern government rests on a single faulty syllogism:
therefore government must act to fix the problem.
This is a possible solution,
therefore it must be the right solution.
Rarely has there been a more perfect embodiment of this principle than the present global financial crisis. Congress’ desire to ‘save face’ by passing a bill quickly has left American taxpayers permanently on the hook for $700 billion in poorly thought out, pork-laden spending. Politicians will certainly pat themselves on their backs for acting so quickly, even as economists (including the Treasury Secretary himself) are skeptical if the bailout will work at all.
Sadly, a majority of the American people seems equally deluded. Rather than face the prospect of an uncertain future, polls reveal that the confused and bewildered American people favor the passage of a bailout that will cost every American at least $2,800, plus interest. That steep price is what politicians and spend-happy citizens are willing to pay to avoid the necessary courage and national self-awareness that this crisis should provoke.
A deeper look within the bailout legislation reveals how delusional the American people, led by their politicians, have become. At its most fundamental level, the legislation removes toxic investments from bank balance sheets and frees up liquidity for Americans to resume borrowing and spending as normal. It does not prevent the inevitable recession from occurring, but only alleviates some immeidate financial suffering, at a very steep price.
Most importantly, America misses a critical opportunity to break away from the cycle of endless, mindless consumption that has created dangerous ripple effects around the world. The $700 billion to finance the bill, like the trillions before it, will pay for the same reckless lifestyle of debt that has created mounds of treasury notes in vaults of central banks in China, Japan, Korea, and Middle Eastern states. Dollar by dollar, the need to consume sells off this country’s future with an ever-growing IOU that the government and its citizens will never be able to pay. Rather than put future generations in a strong financial position as to ensure America’s leading role in the world in later centuries, we choose to spend away that future today. That reckless disregard for future generations (not to mention personal and fiscal responsibility) is the most flagrant abuse of conservatism imaginable.
Taking responsibility by turning down the bailout would have been painful now, but ultimately more beneficial. Ending unsustainable spending practices would have spared future Americans an even larger cost and even deeper pain and allow America to atone for its fiscal sins manifest in runaway deficits and indefensible mortgages and consumer credit lending. Instead, those future Americans will be forced to pay $700 billion for an experiment in forestalling the inevitable.
Gloomy as this outlook is, it remains entirely possible that America will pull through, anyway. From its founding moments, this nation has viewed moments of adversity as opportunities to emerge stronger, wiser, more efficient and more virtuous. This economic crisis will hopefully be no exception. The American entrepreneurial spirit will persist, and work to ensure a more prosperous future. In the short term, lending standards will become stricter, and banks will be more careful with their precious capital. Credit institutions will lend to only to those who are qualified to pay back what they have borrowed—the way it should have been all along.
Regardless, the economic landscape will simplify. With fewer mega banks, local and regional banks will be stronger and will assert themselves in their local communities. Evidence of this phenomenon is already appearing, as the New York Times noted last week. The emergence of local and regional banks will ensure that money will originate and end in local communities, leading to more responsible risk taking and wiser investment. Larger institutions will invest their money more wisely and plan for previously unthinkable economic conditions. Seeing an end to cheap and easy credit, individual Americans may learn the value of saving money and earning something they could not afford without some small sacrifice and delayed gratification.
Slowly, we will begin to rebuild the economic foundations of this nation on sturdier ground. While the bailout forestalls this inevitable reckoning, it cannot prevent it from occurring. In the meantime, all Americans should hope the lessons of this crisis provoke real changes. If not, another bailout may not be too far away.
Mr. Reid is a senior majoring in History.
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