NCPA - National Center for Policy Analysis


December 29, 2008

What should the federal government have done in lieu of the $700 billion bailout signed into law by President George W. Bush?  Philippe Lacoude, president of consulting firm Algokian, and Veronique de Rugy, senior research fellow at the Mercatus Center at George Mason University, present four common-sense steps that don't involve the partial nationalization of the finance industry:

  • Raise the capital ratio for government sponsored enterprises and other investment banks to at least the level imposed on commercial banks -- a cash balance of generally 8 percent of the market value of each firm's tradable assets weighted for the risk of each asset.
  • Extend the capital gains and dividend tax cut past 2010, when it is due to expire under current law; this would raise the rate of return of financial assets at little cost to the Treasury and give a strong incentive to taxpayers to stay in or go back into the market.
  • Lift all Roth IRA contributions and eligibility limits for the rest of 2008; if this had been done, the market would have been allowed to continue reorganizing its financial sector at absolutely no cost to taxpayers.
  • If Congress is absolutely committed to spending the bailout's $700 billion, it should send checks worth $3,600 to the 191 million U.S. taxpayers instead; such a measure would prove popular with an electorate that does not trust the very politicians and technocrats who for years ignored the warning signs of a looming housing crisis.

These measures would have succeeded without socializing a big chunk of Wall Street, a risky and unprecedented intervention into markets whose full effects won't be clear for many years to come, say Lacoude and de Rugy.

Source: Philippe Lacoude and Veronique de Rugy, "Better Than a Bailout," Reason, January 2009.

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