Economy in the Balance

How the bailout is polluting our financial future

In his first book, Earth in the Balance, Al Gore appealed to the world to think beyond the present and look to the future. In today’s financial crisis, we should take his advice. Acknowledging political realities, the former vice president turned eco-crusader said, “One reason many world leaders have difficulty responding to the environmental crisis is that the worst of the predicted effects seems decades away.” When it comes to global warming, the effects aren’t necessarily felt right now, but the things we do today have a significant impact on the world tomorrow.

When it comes to the bailout, the effects won’t be felt right away, but it will have a significant impact on the world tomorrow. The most tangible future loss is financial. Congress will have to take out a $700 billion loan from China (or other nation) that will increase our foreign financial dependency and saddle future generations with even more interest payments. The total cost then is sure to pass $1 trillion and this added debt will have unknown negative effects on our economy.

Another negative impact the bailout will have on our future is the message it sends to financial institutions. Economists call this concept “moral hazard” and in this case the notion can be summed up like this: What’s to stop financial institutions from taking big risks again in the future if they think they will just get bailed out if they fail?

If this bailout was the first time the government had taken this kind of action the argument might be different, but take a look at recent history. The federal government bailed out Chrysler in 1979, and this year they came back to ask for more, along with Ford and GM. When many airlines were facing bankruptcy in 2001 they came to the Congress on the grounds that their survival was in the best interests of the nation. And Wall Street has made the same argument today.

There is a pattern of government believing certain firms are “too big to fail” and this bailout only perpetuates that problem. Fannie Mae and Freddie Mac took big risks because they believed the government would cover their losses. They were right. The bailout does not encourage responsible investing; rather it encourages excessive risk taking. That is a moral hazard.

However, the largest impact the bailout will have on our future is the one that we cannot see. Bailing out Wall Street is not an investment in our future but a discouragement of innovation. The unseen losses are in the opportunities to create value that the bailout takes away. The bailout prevents new, innovative ideas in the financial industry from emerging.

When carmakers threatened the horse drawn carriage industry, the makers of buggy whips switched to seat belts. When computers replaced typewriters and eliminated the jobs of typing staff in offices and newspapers nationwide, we didn’t panic. Instead, the information technology industry was formed, with more jobs and better pay than ever before. We can know that several more financial institutions would fail if no bailout passes. What we don’t know is what could rise from their ashes.

Having a long-term perspective and acute understanding of the unseen effects of our actions are principles every environmentalist has adopted. Those same principles reveal the most destructive aspects of the bailout. They are principles that allow us to look past the surface of today and accept that we have a future to protect too.

What Al Gore and green policy pundits have also accepted is the need for sacrifices to preserve our future. Firms need to invest in energy-saving technology and cut back on emissions—even if there is a cost today. Individual lifestyles need to be adjusted, whether or not there is a cost savings. Pollution, no matter how efficient it is to allow it today, will destroy us tomorrow.

The bailout is pollution for our financial future. And most people know it. The frustrating part is that members of Congress are accepting the pollution on the grounds of efficiency. There will be no innovation to rise from Wall Street’s ashes because no one is willing to accept ashes. There is no willingness to sacrifice for the future.

In 1979, President Carter, facing an energy crisis and stagflation, acknowledged that in the short-term there was simply no way to avoid sacrifice to save the nation. Carter, for all his faults and failures as a president, took the step of asking the American people to take ownership in their nation—and failed. Today’s leaders, John McCain and Barack Obama, are both way off this message, and unwilling to accept any sense of financial pain to promote a better future.

Al Gore notes in Earth in the Balance that world leaders struggle with accepting pain for gain because it usually means death and suffering. In the case of the bailouts that is exactly the choice, some financial firm death and market suffering. Unfortunately, Congress would sooner drag our nation into debt, keeping alive firms that gambled away their futures, than go through even three to six months of negative GDP growth and a temporary freeze in the credit markets.

No pain, no gain.

Anthony Randazzo is a research associate at the Reason Foundation. He blogs at Out of Control, where an earlier version of this has appeared.

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  • BigLiberty||

    However, the largest impact the bailout will have on our future is the one that we cannot see. Bailing out Wall Street is not an investment in our future but a discouragement of innovation. The unseen losses are in the opportunities to create value that the bailout takes away. The bailout prevents new, innovative ideas in the financial industry from emerging.

    Ezzzzactly.

    In other words, I want my flying car already, dammit.

  • rhywun||

    I would have slammed those wimps in Congress a little harder for voting in their own self-interest (job preservation) over their supposed long-term interest in America, but overall a nice article.

  • ||

    "However, the largest impact the bailout will have on our future is the one that we cannot see. Bailing out Wall Street is not an investment in our future but a discouragement of innovation."

    No worries. The next philosopher king that we elect will be sufficiently innovative to craft regulation that steers the financial service industry in the direction of increased efficiency.
    You have to remember the socialist model is to put a choke hold on innovation of the masses and instead rely on the innovation of the few.

  • ||

    The red-green alliance has already started to tell us what sort of changes we will have to make to our life-style. The head of the UN IPCC has already called on people to cut down on meat, and gradually become vegetarians. But that is only the start. A university study group in the UK is saying that mandatory food rationing is needed, to cut down on the amount of milk and meat consumed, because people are not making the proper choices. And eventually the amount of calories consumed by us rich westerners will also be curtailed. When the red-greens get into power, we will start to see the sort of sacrifices THEY think WE need to make, and unlike Jimmy Carter, they will NOT be voluntary.

    Off to the re-education camps with you, with only a bowl of thin gruel. You can pray to our tree gods and seek their blessings.

  • Another Phil||

    Off to the re-education camps with you, with only a bowl of thin gruel. You can pray to our tree gods and seek their blessings.

    I have more Zyprexa than I need this month. You can have my extras.

  • ||

    Wouldn't moral hazard be mitigated by having the government purchase equity? This would set up a natural antagonism, particularly if the government's equity stake came with other strings attached, like caps on CEO pay or various required disclosures.

    Also, Randazzo mentions the bailout of Chrysler in 1979 and the airlines in 2001. In the case of Chrysler, isn't that an old enough example that some calculations of fallout can be made? In other words, is there even a crude estimate of how bad that bailout was for the economy?

    Anon

  • Chris||

    Funny how many of the "sweeteners" added to this legislation are bullshit concessions to green interests.

  • robc||

    Anon,

    In other words, is there even a crude estimate of how bad that bailout was for the economy?


    How many cars did Chrysler sell between 1979 and now. Thats how bad it was.

  • ||

    Wouldn't moral hazard be mitigated by having the government purchase equity?

    I don't see how. The moral hazard is a skewing of the risk/reward relationship. Any insurance, bailout, or rescue scheme creates a moral hazard, however its structured. Unless, I suppose, management knows that any such scheme will begin with wholesale firings of management. That puts the risk back in, at least for them.

    Plus, it creates the additional distortions and conflicts created by having the government sittin as a major equity owner in selected firms or sectors. Not. A. Good. Idea.

  • Don the libertarian Democrat||

    Unless the issue is settled as to whether or not government is going to intervene in these kinds of crises, it is very hard to determine what is the best plan. Obviously, if the government is not, then that issue goes away. However, I assume that the government will intervene in such crises, because many people feel that it is the function of government to mitigate pain in a crisis. In that case, all one can do is try and determine which plan works best given the criteria you set up for it. I appreciate Reason and Cato worrying about moral hazard, but that ship has sailed. If you want people to accept short term pain for long term gain, then you will need some sort of plan to ease the fear that many people have of being destitute. Without doing that, many people will not accept short term misery for long term gain, unless it is a total catastrophe, which the current crisis is not.

  • LarryA||

    So Congress didn't vote against the bailout legislation because they knew enough economics to understand its long-term effects, but because they hadn't had time to load it with all kinds of pork.

    Why am I not surprised?

    I think I'll schedule an evening of cleaning guns and reloading ammo.

  • ||

    Shorter Don:

    "Cato, Reason: you lost long ago. Small government and free markets are dead. Welcome to the wake."

  • DannyK||

    I see environmental issues like climate change and this bailout as being diametrically opposed.

    In one case, we can't do anything about climate change because it might ding the market and slow down the rush to prosperity.

    In the other, we've got to do all sorts of things to fix the problems we're having right now with the market, and hope that the moral hazard and bad precedents we're setting don't hurt us for the next fifty years.

    Two different issues, two different approaches, linked only by expediency and a focus on the market in the short term.

  • ||

    http://gristmill.grist.org/story/2008/10/1/115059/540

    Enviroweenie supersite Gristmill has a story on how the economic downturn is bad for the environment.

  • ||

    If the companies getting the bailouts are too big to fail, then one of the conditions of getting bailed out should be breaking the company up into pieces that aren't too big to fail.

    With that condition, how many of them would take the bailout? Thought so.

    -jcr

  • St. V||

    "When carmakers threatened the horse drawn carriage industry, the makers of buggy whips switched to seat belts. When computers replaced typewriters and eliminated the jobs of typing staff in offices and newspapers nationwide, we didn't panic. Instead, the information technology industry was formed, with more jobs and better pay than ever before."

    I'm all against the bailout... but this was a dumbass analogy.

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