A Question About the Economic Rescue Plans: Who Picks Up the Tab?

 

The government has announced plans to rescue the banking system, to stimulate the economy, and to prevent mortgage foreclosures. These programs have generated many questions regarding their implementation and efficacy. However, the really big question that no one in Washington, D.C. seems to be asking is, Who picks up the tab for the cost of all of these programs?

Bringing up this question is sometimes criticized as being unpatriotic. Understand that I am not debating the need for these programs but, if we do not address how we are going to pay the bill, we are merely postponing our problems and not solving them. If it is decided that the answer is for the U.S. to issue more debt, we must realize that eventually the rest of the world may not want to buy any more. Addressing long-term consequences in the short-term helps avoid the FreePasser mentality that got into this mess in the first place.

Those Who Receive the Benefits Must Bear the Cost

If we are to cure the FreePasser problem afflicting our society, we must try to have the costs borne by those who receive the benefits from the programs. This cost may not necessarily be paid now but should be on their tab in the future. If we do not do this, we are simply creating another generation of FreePassers. We cannot simply pass on the cost to others who had nothing to do with creating the problems.

A Good Example: The Federal Deposit Insurance Corporation (FDIC)

The Federal Deposit Insurance Corporation, which is backed by the U.S. government, provides insurance for people who deposit their money in a bank. We have decided that this is beneficial from a societal point of view as it prevents the bank runs that were so common prior to its creation. This allows for our financial system to function more smoothly.

However, this insurance comes with a fee borne by the banks, and demands an additional layer of regulation. The system is not perfect, but it does attempt to pass on the costs of government assistance to those who make the mistakes.

The Fed (or Greenspan) Put

The idea behind The Fed Put, previously know as the Greenspan Put, was that the Fed could rescue us from a financial crisis by injecting liquidity into the economy. This was incredibly effective during the former Chairman’s tenure. However, there was no cost associated with this and, therefore, people increased the level of risk involved their financial transactions knowing that the Fed would be there to rescue them. One result of this FreePasser practice is our current financial crisis.

The Government May Cushion the Pain But Not Eliminate It

We can debate the desirability of government involvement in these situations. However, if we do decide that the government should be involved, as we did with the F.D.I.C., we must be sure that there are real costs and responsibilities to those asking for assistance.

If we do not do this, we are perpetuating the FreePasser mentality in a different form. Eventually, someone has to pick up the tab. The government can cushion the pain by spreading it over time but should be careful not to make the process too easy.

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