Obama Presidency

Want the Recession to End Sooner? Stop the Bailouts

| by Cato Institute

The fundamental causes of this recession, unique in the experience
of the United States, were mortgage defaults and the consequent
insolvency of major financial firms. These insolvencies, and especially
fear of them, damaged normal credit mechanisms.

The self-correcting nature of markets will ultimately prevail. We
should not underestimate the power of monetary policy; with the sharp
increase in the nation's money stock starting in September, monetary
policy is now extraordinarily expansionary. I believe, though without
great confidence, that the recession will end in the second half of
this year.

Federal
policy is damaging the economy's prospects. It fails to provide the
needed tax incentives for investment in factories and equipment,
incentives that were central to efforts to revive the economy during
the Kennedy-Johnson era and under Ronald Reagan. But government
spending can't lead the way to sustained recovery, because its
stimulating effect will be offset by anticipated higher taxes and the
need to finance the deficit.

Heavy-handed federal intervention into the management of companies
from banks to auto makers will also delay recovery. And misguided
efforts to help distressed homeowners by permitting courts to rewrite
the terms of mortgages will cause banks to limit mortgage lending,
which will prevent housing from contributing to the recovery.

The unrelenting anger across the country over bailouts of
corporations and households that made unwise and even irresponsible
financial decisions is influencing federal policy. Punitive measures,
like forcing companies receiving federal dollars to cancel employee
events, will increase uncertainty over where the government will strike
next in its effort to deflect public outrage. Instead of more bailouts,
we need a clear and consistent path to fundamental reform of our
financial system.

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