the power of a bailout?!

This is a repost from a friend, Asher Edelman, who has particular insight into the economy. We agree with him that the economy will not be helped by propping up failing financial institutions without making them responsible for their failings, and without helping the people who are being harmed. A strong economy is dependent on a vibrant middle class — and that middle class is the group most beset by the current financial crisis. Please feel free to pass along Mr. Edelman’s insights to whomever expresses an interest, and to those who may actually have some influence over the current flailing going on at the high levels where these decisions are being made

BAILOUTS/ INFLATION

This morning we learned of the Citicorp bailout, so far the largest of the combined guarantees/ grants given by government. It is interesting to note that the large part of the Citicorp package is in the form of guarantees. At best these guarantees resemble interest free loans, at worst gifts. In either event, the taxpayer is the loser. Would it not have been better for government to have bought the risky assets at a discounted price and reduced interest and principal payments to borrowers? We have not yet reached out to the homeowners, credit card debtors and other of the disadvantaged borrowers. Without this outreach, bailouts to the banking community will not help revive the economy.
The nature of the bailouts put in place so far is highly inflationary and unbalanced. Though we are in a deflationary moment in the cycle the plans, as currently extant, will prove to be highly inflationary and put the longer term picture at great risk of runaway inflation. Solutions are not simple, but clearly require focus broader than sating Citicorp’s and Goldman Sachs’ needs.

Asher B. Edelman