Bailout plan version 2.0 passed in both the House and the Senate. But did we really need the bailout? What are the positives and negatives of this plan? And how much of the plan was revised for political means rather than practical and economic means?
Real free market economists would say, "No bailout plan is needed," and give the reason that what's happening to the financials is just a way of the market self-correcting. If you believe the free-market economists, then we should have simply let the banks that were going bankrupt go bankrupt and let the situation and the free market resolve themselves. The only question then, would be how long of a recession the self-correcting period would be and how bad of a recession that would be. For those two questions, there really seems to be no concrete answers.
The main concern with the free-market approach, though, was that if there was no bailout plan, there would be no liquidity for the banks that managed not to go bankrupt. This would mean that banks simply wouldn't have the money that's needed to give out loans for simple things like cars and homes, and a subsequent domino effect would end with rates getting raised everywhere in order for banks to find some way of getting money.
Now, the bailout plan is no silver bullet to the problems of the financial industry. First off, the bailout plan is not strictly spending money to bail out the financial industries; instead, tax breaks and pork barrel spending are attached like crazy to the bill. This was needed to pass the bailout bill the second time through the House, but it's a sad statement that Congress couldn't originally rally around a bill that many thought would be able to save the economy from certain depression.
More importantly, all those billions of dollars are going to come out of the taxpayers' pockets. Framed correctly, the argument could be made that average Americans have to pay higher taxes because greedy corporate CEOs got a little too carried away with making money, and found their companies filing for bankruptcy after some of their policies didn't work. This kind of spin on the issue is exactly what House Democrats were worried about when voting for the original bailout plan.
Also, another problem that could arise from the bailout plan is what's known as a moral hazard problem. By allowing this bailout to take place, the government is setting the precedent that financial companies can make riskier decisions because the government will be there to bail them out of debt if their decisions fail. This sets an awful precedent for financial industries in the future: If they don't get punished today, what's to stop them from doing it again tomorrow?
But how does this all translate to politics and the upcoming election? Bailout 2.0 was ammended to court those in the House that voted it down originally by adding in tax breaks and other pork barrel spending. This is important to consider, when thinking that if this weren't an election year (and about a month away from the actual election), there probably wouldn't have been much of a need for a second bailout plan.
The bailout plan puts both parties in a precarious situation, though. The Democrats don't want to look like they love to levy taxes on the people, and Republicans don't want to make it seem like they are endorsing these taxes. In addition, Republicans don't want to make it look like they are letting the free market slip away, while Democrats don't want to make it look like they want everything they can get their hands on government-run. Those who voted down the first attempt at the bailout were simply trying to "stick to their values" prior to the election. But, once pork barrel spending and tax breaks became involved, it sweetened the deal way too much to pass it up.
It really is a sad state of affairs in our country when a bill that normally would be easily passed has a hard time just because it is an election year, but I suppose that's the bad side of the double-edged sword that is the American republic.
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