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Concord’s Take on the $700 Billion Financial Bailout

September 26th, 2008 . by economistmom

The Concord Coalition’s official “position” on the financial rescue package was released today.  Here is a cut and paste of it:

WASHINGTON — As Congress and the Bush Administration negotiate a $700 billion plan to shore up credit markets by purchasing “troubled assets,” The Concord Coalition urged them to heed the lesson of Wall Street’s failure: corrective actions are more effective and much less costly if taken in advance of a crisis rather than in the face of one.

Concord said that in dealing with the immediate crisis, policymakers should limit taxpayer exposure, maximize transparency of any new obligations and develop a debt repayment plan to ensure that the short-term emergency measures do not result in further deterioration of the long-term budget outlook. More fundamentally, however, policymakers must acknowledge and begin to address the fact that the federal budget is itself suffering from the same over-reliance on debt and lack of transparency that doomed the institutions they are now rushing to rescue. If they fail to do so, the eventual and inevitable consequences for the economy are no less stark.

“It’s fine to hope for the best, but we should budget for the worst. While the intent of this plan is to recoup much, if not all, of the initial cost to taxpayers there are no guarantees. The value of the assets to be purchased is highly uncertain. What we know for certain is that the government will incur a huge upfront cost, immediately adding to the debt and immediately incurring compounding interest payments. All of this will be layered on top of a deficit expected to exceed $500 billion next year, and an overall fiscal policy that is unsustainable. Meanwhile, we are borrowing increasing amounts from abroad to make up for our inability to make crucial budgetary decisions. The answer to every problem in Washington seems to be more debt. That simply cannot go on. Given the uncertainty of the return on this $700 billion of new borrowing, and the daunting challenges already confronting the fiscal outlook, Congress should adjust budget policy either though phased-in spending cuts or tax increases to ensure against any permanent fiscal deterioration,” said Concord Coalition executive director Robert L. Bixby.

The Concord Coalition further stressed that once the immediate threat has passed, and the new administration and Congress start their work next year, their agenda must confront the nation’s long-term fiscal challenges. 

“Washington can normally act in the face of a crisis.  We don’t need to relearn that lesson.  A more fundamental issue is whether we can learn from the current crisis and finally break the pattern of routinely ignoring long festering problems. It is no secret that our nation is entering an unprecedented and permanent demographic transformation to an older society and that we are doing so with steadily rising health care costs and steadily falling national savings. This is a dangerous combination for the future health of the economy. And yet, nothing in the budget process requires Congress to review the current-law outlook beyond the next five years, much less take corrective action.  If we learn from Wall Street’s mistakes, we can act more effectively, with less pain, and more time to prepare the public for difficult but necessary choices. If we don’t change course, the federal government itself will be in need of a bailout,” Bixby said.

I would add two of my own personal complaints about the $700 billion bailout proposal, in the context of fiscal discipline.  I have heard the price tag referred to in two ways:  (i) $700 billion is a small amount to add to the federal debt relative to the $53 trillion in unfunded liabilities (”fiscal exposures”) that Dave Walker talks about in I.O.U.S.A.; and (ii) that other deficit-financed spending that Congress is working on passing is small relative to that $700 billion.  Both such comparisons undermine Concord’s message.  The $700 billion would be an immediate increase in the debt and would begin to rack up associated debt service costs (i.e., compounding interest) immediately.  And using the $700 billion increase in debt as an excuse for waiving pay-go on other spending or tax cuts that amount to “just” tens of billions of dollars is just shameful.

What’s likely a “silver lining” in this bailout proposal is the negative reaction of Americans who understand this represents a huge burden that would be shifted to American taxpayers.  (It really represents a potentially many-fold burden on future taxpayers, but it’s the fact that current taxpayers are scared about their own financial security that is getting everyone to finally pay attention.)  This may be exactly the kind of “wake-up call” our country has needed.

In case you hadn’t heard, no deal on the bailout has yet been worked out.  Policymakers will continue to work on it over the weekend.  Meanwhile, tonight’s debate will go on.

One Response to “Concord’s Take on the $700 Billion Financial Bailout”

  1. comment number 1 by: Kristie Brown

    I am doing a research paper on America’s Economy, I was wondering could anyone answer the following questions (if you find on a website please included the website):

    Introduction
    What do you think of the leaders in Washington?

    Bailout Questions
    1. Who do you thing are the contributors to the financial crisis? Why?
    2. Do you blame individuals who wanted a house? Why?
    3. Do you agree with Paulson’s Plan on the bailout? Why or Why not?
    4. What do you thing of the $2.3 trillion that went missing from the pentagon?
    5. If you were chosen to help develop a solution to the financial crisis, what would you suggest the government do? Why?
    6. Are there any comments you would like to make on the subject other than what was asked?

    I.O.U.S.A. Questions (some questions taking from the The Concord Coalition’s website)
    1. Do you believe that budget deficits matter?
    2. Do you have a plan to balance the federal budget?
    3. What specific spending cuts would you propose to help balance the budget?
    4. What assumptions do you make regarding the future of defense spending?
    5. Do you have any suggestions on how to deal with the budgetary consequences of extending some or all of the expiring tax cuts?
    6. What will you suggest to slowing the growth of health costs as you are to expanding health care coverage?
    7. What are suggestion would you make to close Social Security’s long-term funding gap?
    8. Are there any comments you would like to make on the subject other than what was asked?

    Overspending
    1. What do you think of American’s spending habits?
    2. What do you think of the government spending habits?
    3. What do you think of the credit card companies offering incompetent people credit access?
    4. Do you have any suggestions about American’s spending habits?
    5. Do you have any suggestions about the government spending habits?
    6. Are there any comments you would like to make on the subject other than what was asked?

    Conclusion
    What do American future’s looks like to you?