The Competitive Enterprise Institute has set up a new website “Bailout Watch” to monitor developments. John Berlau asks whether the bailout will make matters worse:
But what if the bailout, as originally proposed and in its latest incarnation, would spend $700 billion of taxpayers’ money and actually make the economy worse? Believe it or not, there is good evidence this may happen. The inflationary prospects of the bailout price tag may lead to spikes in oil and crop prices that could hit ordinary Americans in their cars and on their kitchen tables. And government purchases of financial assets could ironically further constrain credit through causing write-downs on even the balance sheets of financial firms not participating in the bailout by worsening the effects of mark-to-market accounting rules.
All last week, the stock market’s plunging downward was pointed to as a sign that Washington must step up to the plate — as quickly as possible. Yet ironically last Friday — the day after the bailout talks broke down at the wild White House meeting with the presidential candidates — the Dow Jones industrial average actually went up by 120 points! This doesn’t mean that the market is opposed to the bailout, but it does show that the market volatility is probably as much due to the potential effects of a bailout as it is to a lack of one.
Add to this the possible unintended consequences of the bailout for other industries (such as hedge funds, for example) and the difficulty of resisting future bailouts for other industries.
I’m not sure that Berlau’s concerns fully offset any potential benefits from a bailout, but they seem plausible as potential offsetting factors.