PRO: Government bailout sure recipe for financial drunken stupor

Former Federal Reserve Board Chairman William McChesney Martin said the job of the central banker is “to take away the punch bowl just as the party gets going.”

Over the past several weeks, we’ve been told the punch bowl that is our capital supply has run dry, that the party has created an awful mess and that the check is going to be pricey.

But sobriety has become an underrated virtue, and a reluctance to soberly face the state of the American economy underlies the recent government bailouts of the faltering financial system. The subprime mortgage crisis itself, the root of the current problem, resulted from distorted perceptions. Homebuyers failed to realistically assess their means and financiers failed to realistically evaluate the value of the securities they held. Thus, they took an overly optimistic view of their risks.

The solution to years of misperception is not to keep markets artificially buoyant, but to allow them to return to a realistic reflection of economic realities. We can rest assured that there is a lot of capital left in the world, and capital tends to go where it can find strong returns.

The strength of the American economy rests upon technological ingenuity, productivity and our output of goods and services. Liquidity — though not an end in itself — is valuable if prudently applied to the above economic ends. The 18 months or so of financial hardship which will result if we allow the markets to correct themselves will restore the sobriety and prudence of America’s financiers. Reawakened to the need to take a longer view of their investments and not quickly forgetting the pain of its last hangover, finance will regain its vitality and, having learned its lesson, once again fund economic growth rather than the conspicuous consumption.

Fund the bailout, and the financial sector will remain in a perpetual state of intoxication. Crippled by the chains which grandstanding congressmen will force upon it, American finance will lose its historic flexibility and vigor. Living with a perpetual safety net and refusing to face reality, it will forfeit the wisdom obtained only through real hardships, and with a whimper, which no one will notice until its too late, American economic power will decay into decadence. —Carl Forsberg

PRO: Myopic federal action will lead to economic pleiotropism

When times are tough in our economy, the impulse seems to be to the open arms of the government. They always beckon seductively with promises of a recovery — or at least a promise to stop some of the financial bleeding. But even if we accept the unproven premise that the collapse of a few poorly run businesses constitutes the impending collapse of the entire economy, we must not allow the threats associated with inaction to quicken our pace and blur our vision. That can only prevent full consideration of the consequences of the proposed solution.

Stepping back from the current panic and taking a deep breath, anyone surveying the full situation can only gasp anew. In the most expensive and wide-reaching centralization scheme in decades, the Bush administration and a bipartisan cadre of congressmen have agreed to a bailout that will put hundreds of billions of taxpayer dollars in the hands of just one man. The national debt, already astronomically high, will have to increase dramatically to cover the cost. The proposed amount has now been reduced, but $350 billion is still a huge amount — over $1,100 per American — and if that amount will really suffice, why did the administration originally ask for twice as much?

It is far from clear that the financial sector needs or deserves the bailout, and we must recognize that there is more at stake here than the distortions of incentives that such a bailout would create. Reasonable people on both the left and the right should pause to reflect about this decision. It matters not whether you fear McCain or Obama controlling such a program, or whether you fear centralized government power over your wallet or your privacy: The plot must be stopped. —Matthew Gereken

CON: Tighter regulation promises to steer economy toward health

The American taxpayer should not take responsibility for the reckless actions of private investment banks.

However, the American voter should take responsibility for the actions of our elected representatives and our president who, in the current financial crisis, are the root of the problem.

In 1995, the Community Reinvestment Act was altered by President Clinton and Congress to allow increased lending to low-income Americans and the securitization of mortgages backed by this law.

As a result, a boom occurred in the number of loans that did not require that the borrower’s source of income be verified. As these loans were bundled and sold off to investment banks as securities, the basis for the current crisis was created.

Ironically, the first bank to take advantage of this new option was the now defunct Bear Stearns.

With the solvency of numerous investment banks riding on continued growth in home prices, the economy ended up in a very perilous place.

Now that this government-sponsored scheme has collapsed, the government must steer the economy away from a severe contraction by purchasing these bad mortgages.

Under the framework of the Paulson bailout, the federal government would be given the authority to buy worthless mortgages from private financial institutions, freeing the credit markets and preventing the failure or nationalization of more private businesses.

This purchase comes at a high price; however, Americans are the ones choosing who sets government policy, and Americans must now take responsibility for a run of apparently poor electoral decisions. —Joshua Robbins

CON: Even Bernanke knows inaction is the worst choice of all

With the pundits speaking authoritatively in every direction on the economy, it’s easy to forget that economics is one of the least well understood disciplines in all of the social sciences. Adam Smith devotees are correct when they say that the best justification for a free market is that no one has enough information to make broad decisions about the economy. How strange, then, that they should cling to the simplistic models economists put forth and treat them like scripture when attempting to fix an ailing economy.

Neoclassical economics has a great deal to say about the Platonic ideal of the economy and very little to say about an economy in collapse. In today’s crisis, we should act based on one of the few things we do know about the economy: When it takes a serious hit, it tends to spiral down disproportionately because people become afraid and withdraw their investments, which further depress the economy.

Ben Bernanke is an expert on the Great Depression, and a wise man: It’s pretty clear he doesn’t know what he’s doing in a specific sense, but he does know that doing nothing to stop the spiral is the worst of all possible options. More than anything else, the bailout is a psychological stopgap measure to prevent an entire economy from making a run on its banks. —April Lawson