Eliot Spitzer: bailouts a bad idea

Eliot Spitzer, the former Attorney General and Governor of New York State who resigned the later office amid a prostitution scandal, has an interesting op-ed on the current bailouts and America’s economic problems in general.

[C]urrent bailouts—a remarkable $7.8 trillion in equity, loans, and guarantees so far—may merely perpetuate a fundamentally flawed status quo. So far, at least, we are simply rebuilding the same edifice that just collapsed. None of the investments has even begun to address the underlying structural problems that are causing economic power to shift away from the United States, sector by sector.

This long-term change frames the question we should be asking ourselves: What are we getting for the trillions of dollars in rescue funds? If we are merely extending a fatally flawed status quo, we should invest those dollars elsewhere. Nobody disputes that radical action was needed to forestall total collapse. But we are creating the significant systemic risk not just of rewarding imprudent behavior by private actors but of preventing, through bailouts and subsidies, the process of creative destruction that capitalism depends on.

Spitzer argues that, instead of rescuing these financial giants as they currently are, we should take this opportunity to rethink how these institutions are set up.  He says the gigantic financial institutions that currently exist create three problems: (1) they become too bloated and inefficient; (2) with fewer banks and other institutions competition is decreased; and (2) they become “too big to fail.”  The first problem could be solved by market forces, given time; the later two cannot.

The erstwhile governor argues that “the better policy is to return to an era of vibrant competition among multiple, smaller entities—none so essential to the entire structure that it is indispensable.”  If we’d done that previously, we might not have to throw trillions of dollars at these companies now and could dedicate the funds to solving other problems like:

  • our incredibly low, if not negative, household savings rate;
  • our huge trade deficit;
  • our huge budget deficit; and
  • middle class stagnation.

It’s an interesting article.  Unfortunately, it does a much better job demonstrating the problems than pointing out their solutions.

1 comment so far

  1. omegamormegil on

    Yeah. From the looks of things, we’re going to have to hit rock bottom before the system can correct itself, since we just keep taking out loans to keep the broken machines going. It reminds me of how consumers compensate for reduced income by increasing credit card spending. What is needed is a change in lifestyle, and that’s awfully painful. Looking back at these bailouts, I have trouble believing we’re going to do what needs to be done, until there’s no more money and it gets done for us.

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