Tuesday, September 30, 2008

Dennis Kucinich and the bailout

Dennis Kucinich was one of the Democrats who voted against the bailout. In an interview which took place just a little while ago, Senator Kucinich asked where the government would get the 700 billion dollars? He answered his own question saying that we would have to borrow it! So in other words, as Kucinich pointed out, we would have to borrow 700 billion dollars from some bank(s) (with interest!!!) so we could bail other banks out.

On the other hand, one expert predicted earlier today that if we don’t do this, literally thousands of businesses will go out of business.

Of course Kucinich didn’t mention that while John McCain had been warning of the problems with Fannie Mae and Freddie Mac, the Democrats ignored and even blocked his attempts to take action.


Kevin said...

I don't think Kucinich is right... or at least I don't think we'd borrow it against a bank. The immediate concern of the rescue is the credit and liquidity problem, by borrowing from a bank we eat up some of the available resources for loans. The rescue would be borrowing against money that could be available for good productive loans in order to make good and productive loans, doesn't seem reasonable.

I think, the borrowing here, is against the American public... we just print the $700 billion. Inflation goes up, end of story. We could write bonds or some other instrument and again borrow against the public (and banks who were interested I guess).

Alcamadus said...

I always considered it more of a kind of "transference" in that the government has to save these banks from bombing by buying up their debts and then handling them themselves so that the economy can continue as normal.

In insurance this is much like "Reinsurance" in that a company will actually get insurance for its insurance (if that makes sense). They do this because it allows them to handle accounts much larger than they might be able to with the size of their company, and it also acts as a safety net in case that they can't handle the entire risk.

It doesn't parallel exactly, but you get the idea. The government is basically acting as a type of insurance company by bailing these guys out and making sure the economy continues to be stable.

The idea behind deficit spending is never really "reasonable" in our sense of the word, but at the same time in times of market crisis it can almost be the only way to stave off a disaster. Just like it sounds crazy to throw fire onto fire to stop a fire (which is a common practice with large forest fires) it is the same thing with this kind of crazy spending.