Will the Bailout Plan Work? Economists Weigh In

President George Bush, Treasury Secretary Henry Paulson and Fed chief Ben Bernanke made their case earlier this week, arguing that the American economy will suffer a disastrous recession if lawmakers don’t quickly adopt the bailout plan proposed last Friday. Drawn-out debates Thursday resulted not in a finalized plan, but in initial reports of an agreement to stagger funds into a bailout, with $250 billion placed into the hands of the Treasury, followed by $100 billion installments if necessary. So far, reports on the financial bailout have read like a bad movie trailer, the Economic Policy Institute’s Jared Bernstein told the New York Times. “A guy with a deep, scary voice says, ‘…only one man, with one plan can save us,’” Bernstein told the Times. Capitol Hill seems to agree that something must be done to stabilize the economy, and that “something” will most likely be taxpayer dollars — lots of them — used to buy up troubled assets. The questions asked now by economists and concerned citizens alike deal with the plan’s supposed role as our only solution, and its long-term effectiveness. Arguing that the original Treasury proposal contained three “fatal pitfalls,” more than 200 academic economists signed a petition to Congress earlier this week; the economists cited the proposal’s lack of fairness to taxpayers, the ambiguity of its terms and potentially disastrous long-term effects. The petition, which can be seen here, asks Congress to take its time carefully debating the plan before rushing into approval. “For all their recent troubles, America’s dynamic and innovative private capital markets have brought the nation unparalleled prosperity,” economists said in the petition. “Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.” One economist who signed the petition argued the plan can not work because it fundamentally defies a capitalist free market. “The structure is designed for the Treasury to be the first line of defense,” David Levine, a University of California-Berkeley professor, told Bloomberg. “A whole lot of people made money supposedly by putting their capital at risk, and those are supposed to be the first line of defense, that’s how capitalism works.” Besides violating basic capitalistic principles, the plan simply fails to address key issues behind the troubled economy, as reported Friday in the Wall Street Journal. “There is a kind of suggestion in the Paulson proposal that if we only provide enough money to financial markets, this problem will disappear,” Nobel Prize-winning economist Joseph Stiglitz told the Washington Post. “But that does nothing to address the fundamental problem of bleeding foreclosures and the holes in the balance sheets of banks.” The plan is also fundamentally flawed because it doesn’t solve the practices that led to the current crisis, Affie Mahini, a Californian business owner, told the San Jose Mercury News. “Six months from now, the banks will be doing the same irresponsible things that got them into this mess in the first place,” Mahini said. “They’re acting like a 14-year-old boy who steals the family car, crashes it, then expects his mom and dad to pay for it.” Editor’s note: To contact the reporter on this story, email diana.golobay@housingwire.com.