September 27, 2008

RESTORING VELOCITY:

WHY THE BAILOUT?: THE CASE BUSH HASN'T MADE (BRUCE BARTLETT, September 27, 2008, NY Post)

The basic problem is that the financial sector faces systemic risk in a way that no other industry does: By its nature, it is a house of cards that can collapse at a moment's notice.

Let me explain.

First, the vast bulk of the nation's money supply is in the form of bank deposits, not currency and coin. No bank on earth could pay even a fraction of its depositors if they all demanded all their funds in cash immediately. This is called a run on the bank (and is very familiar to anyone who has ever watched "It's a Wonderful Life").

During the Great Depression, such runs forced hundreds of banks to close. At the time, there was no system for protecting bank deposits - so a vast amount of money literally disappeared in the process. The nation's money supply contracted by about a third between 1929 and 1933.

As a general proposition, a one-third decline in the money supply would, in the aggregate, lead to about a one-third decline in the prices of all goods and services. If that could happen quickly and easily, changes in the money supply would have no effect on the real economy.

But that's not the case, of course. Businesses resist selling goods for less then they paid for them, workers resist cuts in their pay, and so on - leading to an economic depression.

Bush, lawmakers say deal on bailout is near (David R. Sands and Sean Lengell, September 27, 2008, Washington Times)
Both ends of Pennsylvania Avenue sounded a note of rising optimism Saturday as President Bush and leading congressional negotiators said talks for the $700 billion Wall Street rescue plan were back on track and a deal could be cut before the international markets open late Sunday.

Treasury Secretary Henry M. Paulson Jr. traveled to Capitol Hill to huddle with top Democratic and Republican lawmakers, just hours after President Bush in his weekly radio address said he was "confident that we will pass a bill to protect the financial security of every American very soon."

In a possible signal that a deal was close, the House Rules Committee began drafting guidelines for a debate and vote that could take place as early as Sunday, which would send the bill to the Senate for final passage Monday.


Posted by Orrin Judd at September 27, 2008 6:39 PM
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