Wavepacket Blog

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Thu Sep 25 22:35:27 2008
Open Letter
Open Letter to my Representative and Senators

Open letter to my US Representative (Jim McDermott) and US Senators (Maria Cantwell and Patty Murray)

Dear Senator Murray, Senator Cantwell, Representative McDermott:

Please do not approve the administration's proposed $700 billion bailout plan!

I know you care deeply about the health of the nation's economy, and the impact on local businesses. And I am sure we would all gladly pay now to prevent a damaging recession or depression later.

However, the Administration's proposal does not guarantee the future health of the economy.

At best, it may prop up some failing investment banks a little bit longer.

At worst, it will reward those institutions that took inappropriate risks with their investor's money. And it will tie up funds that could be used to fight a recession or depression more effectively.

Most importantly, there is no clear reason why this large sum of money should be spent or allocated now.

The proposal is right to focus on subprime mortgage instruments as a key factor in the current crisis among investment banks. Those instruments will probably continue to lose value over the next year, as more mortgage holders default, and investors decline to purchase them. However, that decline is not likely to be stopped by the Administration's plan. Instead, the result will be a lot of taxpayer money spent on instruments that will continue their collapse.

Also, the impact beyond overly-leveraged investment banks is not clear. Many parts of the national and world economy are more healthy, including commercial banks.

It is possible that the Administration's plan will not be able to stop a wider economic downturn, and the $700 billion will simply evaporate.
It is possible that no wider economic downturn will happen, and the Administration's plan only lines the pockets of poorly-managed investment banks.
It is unlikely that a wider economic downturn could be stopped by purchasing a fraction of available mortgage instruments.

There are measures that could be taken to improve the health of the economy!

Restore the separation of investment and commercial banks. The Federal Government should not be insuring high-risk investment companies. This means restoring parts of the Glass-Steagall Act of 1933, which was repealed by the Gramm-Leach-Bliley Act of 1999. The current crisis was greatly exacerbated by the risks that investment banks took with commercial deposits.
Get the deficit under control. Large budget deficits have put the dollar at risk, and made foreign creditors unwilling to loan us money. If foreign creditors lose confidence in the US Dollar, and we have not restrained our spending, the result would be either economic collapse or hyperinflation. That is much worse than a recession.

But whatever you decide to do, please do not vote for the Administration's plan! It is only likely to reward those who took inappropriate risks, and will not prevent a recession if one is truly coming.

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