Despite skepticism from many members, the U.S. Congress seems poised to approve the White House's proposal for a $700 billion bailout of the country's financial institutions.
But at least one economist, Allan Meltzer, professor of political economy at Carnegie Mellon University's Tepper School of Business, dismisses warnings that the program is essential to restore confidence in the U.S. free-market system. Speaking to RFE/RL correspondent Andrew F. Tully, Meltzer, a respected expert on monetary policy, says there's plenty of private money -- and confidence -- to rescue Wall Street without risking a penny of the taxpayers' money.
RFE/RL: There's a general sense in Washington that Congress will pass at least some form of a bailout plan for Wall Street, despite the concern felt by many on Capitol Hill. The reason cited is that, like it or not, a bailout is simply necessary to restore confidence in the country's financial markets. Do you agree?
Allan Meltzer: No, I don't. I don't see any evidence [that the move is necessary]. The economy has been moving along. These people [government officials] have been predicting disaster since January. Their forecasts have just been wrong. They may be right this time, but let's put it to the test. What I see so far happening is nothing like what they're describing.
Let's take some examples. Lehman [Brothers, the stock brokerage that recently was allowed to fail]: well, in about a week it had sold its U.S. operations to Barclay's [Bank of London], it sold its foreign operations to a Japanese bank. So there seems to be money around to bail these things out, if the government gets out of the way.
What happened with Goldman Sachs, [another broker whose stock has fallen]? It just got $5 billion from a domestic source, Mr. [Warren] Buffett [the leading U.S. investor]. Buffett must think that there's value there. I mean, he's not what's known as a stupid investor.
And there are lots of other examples. I mean, AIG [American International Group, which the U.S. government recently bailed out] -- there were three [private] offers for AIG. They [AIG's board] didn't take them. The reason they didn't take them was probably because they thought they'd get a better deal from the Treasury.
RFE/RL: So you're saying a bailout by the U.S. Treasury simply isn't necessary because there's plenty of private money available to rescue faltering financial institutions? And that there's more confidence in the system than the U.S. administration believes there is?
Meltzer: There's enough people with private confidence and who know a bargain when they see one to say, "Gee, this is a good time to buy up these distressed assets." There seems to be capital around the world that believes that the U.S. is not falling apart and that these assets are cheap and it's a good time to buy.
So I just don't see the evidence that this [a complete collapse of the financial markets] is going to happen. And if it does happen, well, [there will be] time enough to do things [consider rescue plans], and there are things that they can do without coming up with $700 billion.
Other Solutions Than Bailout
RFE/RL: What are the alternatives?
Meltzer: One would be to apply a law that we have on the books since 1991, which says before the capital is all gone [from a company], the government can take it over and reorganize it. It doesn't need to put in $700 billion, it can do them one at a time if it has to.
We have the FDIC [Federal Deposit Insurance Corporation] to help with smaller banks -- it can't handle the huge ones, but the huge ones don't seem to be in need of a bailout at this point.
RFE/RL: What about the slowdown in lending because of the bad home loans, or mortgages, that caused the current economic shock in the first place?
Meltzer: Banks are lending "C and I" loans -- commercial and industrial loans -- at banks are going up, there isn't a sign yet of a credit crunch that they keep talking about -- except in New York. That's where the heart of this crisis is. And how does bailing out the New York banks and insurance companies and so on -- how does that help solve the problem of housing? I don't see it. I don't see the connection.
RFE/RL: Professor Meltzer, you said a little earlier that big U.S. companies usually get their way -- get a government bailout -- because they convince the government that the U.S. economy can't survive without them. Are there examples where Washington didn't come to their aid?
Meltzer: For 40 years, I've heard the government tell us that if we don't do this [bail out foundering corporations], the world is going to come to an end. Well, there've been only three examples that I know of where that didn't happen.
Let me tell you just one of them. The Penn Central Railroad failed -- went into bankruptcy -- in 1970. Many thought this is really a disaster, and they started to yell, "Disaster! Disaster! We really need help!"
President [Richard] Nixon was about to agree on a bailout when, lo and behold, Penn Central hired as its bankruptcy lawyer the Rose law firm, from which Nixon came. That made it toxic [as a conflict of interest], as far as Nixon was concerned. He didn't do the bailout. And what happened? Very little. There are other examples of this, but not many because they [companies] usually get their way. This time, maybe not.
RFE/RL: Are you saying it's time that the U.S. government shouldn't rescue Wall Street, letting it earn its lumps for betting other people's money on risky investments?
Meltzer: I don't want to punish people for making mistakes. In life, we all make mistakes, so it's not punitive. I'm opposed to this [government bailout plan] because I don't think it's necessary. I believe we could get a market solution if the government would stop pushing money at the problem. And if we need to do it, there are other ways to do it. I mentioned one.
Another one would be to make loans. Why not lend them the money and make them pay it back with interest? If they need it and they're in crisis, that's a solution. This [bailout plan] is the government protecting the private interest at the expense of the public interest, and I don't like that. And I believe that we won't have a [financial] system for very long if we allow the bankers to make the profits and the public takes the losses. I'm not against them making the profits, but they have to take the downside along with the upside.
But at least one economist, Allan Meltzer, professor of political economy at Carnegie Mellon University's Tepper School of Business, dismisses warnings that the program is essential to restore confidence in the U.S. free-market system. Speaking to RFE/RL correspondent Andrew F. Tully, Meltzer, a respected expert on monetary policy, says there's plenty of private money -- and confidence -- to rescue Wall Street without risking a penny of the taxpayers' money.
RFE/RL: There's a general sense in Washington that Congress will pass at least some form of a bailout plan for Wall Street, despite the concern felt by many on Capitol Hill. The reason cited is that, like it or not, a bailout is simply necessary to restore confidence in the country's financial markets. Do you agree?
Allan Meltzer: No, I don't. I don't see any evidence [that the move is necessary]. The economy has been moving along. These people [government officials] have been predicting disaster since January. Their forecasts have just been wrong. They may be right this time, but let's put it to the test. What I see so far happening is nothing like what they're describing.
Let's take some examples. Lehman [Brothers, the stock brokerage that recently was allowed to fail]: well, in about a week it had sold its U.S. operations to Barclay's [Bank of London], it sold its foreign operations to a Japanese bank. So there seems to be money around to bail these things out, if the government gets out of the way.
What happened with Goldman Sachs, [another broker whose stock has fallen]? It just got $5 billion from a domestic source, Mr. [Warren] Buffett [the leading U.S. investor]. Buffett must think that there's value there. I mean, he's not what's known as a stupid investor.
And there are lots of other examples. I mean, AIG [American International Group, which the U.S. government recently bailed out] -- there were three [private] offers for AIG. They [AIG's board] didn't take them. The reason they didn't take them was probably because they thought they'd get a better deal from the Treasury.
RFE/RL: So you're saying a bailout by the U.S. Treasury simply isn't necessary because there's plenty of private money available to rescue faltering financial institutions? And that there's more confidence in the system than the U.S. administration believes there is?
Meltzer: There's enough people with private confidence and who know a bargain when they see one to say, "Gee, this is a good time to buy up these distressed assets." There seems to be capital around the world that believes that the U.S. is not falling apart and that these assets are cheap and it's a good time to buy.
So I just don't see the evidence that this [a complete collapse of the financial markets] is going to happen. And if it does happen, well, [there will be] time enough to do things [consider rescue plans], and there are things that they can do without coming up with $700 billion.
Other Solutions Than Bailout
RFE/RL: What are the alternatives?
Meltzer: One would be to apply a law that we have on the books since 1991, which says before the capital is all gone [from a company], the government can take it over and reorganize it. It doesn't need to put in $700 billion, it can do them one at a time if it has to.
We have the FDIC [Federal Deposit Insurance Corporation] to help with smaller banks -- it can't handle the huge ones, but the huge ones don't seem to be in need of a bailout at this point.
RFE/RL: What about the slowdown in lending because of the bad home loans, or mortgages, that caused the current economic shock in the first place?
Meltzer: Banks are lending "C and I" loans -- commercial and industrial loans -- at banks are going up, there isn't a sign yet of a credit crunch that they keep talking about -- except in New York. That's where the heart of this crisis is. And how does bailing out the New York banks and insurance companies and so on -- how does that help solve the problem of housing? I don't see it. I don't see the connection.
RFE/RL: Professor Meltzer, you said a little earlier that big U.S. companies usually get their way -- get a government bailout -- because they convince the government that the U.S. economy can't survive without them. Are there examples where Washington didn't come to their aid?
Meltzer: For 40 years, I've heard the government tell us that if we don't do this [bail out foundering corporations], the world is going to come to an end. Well, there've been only three examples that I know of where that didn't happen.
Let me tell you just one of them. The Penn Central Railroad failed -- went into bankruptcy -- in 1970. Many thought this is really a disaster, and they started to yell, "Disaster! Disaster! We really need help!"
President [Richard] Nixon was about to agree on a bailout when, lo and behold, Penn Central hired as its bankruptcy lawyer the Rose law firm, from which Nixon came. That made it toxic [as a conflict of interest], as far as Nixon was concerned. He didn't do the bailout. And what happened? Very little. There are other examples of this, but not many because they [companies] usually get their way. This time, maybe not.
RFE/RL: Are you saying it's time that the U.S. government shouldn't rescue Wall Street, letting it earn its lumps for betting other people's money on risky investments?
Meltzer: I don't want to punish people for making mistakes. In life, we all make mistakes, so it's not punitive. I'm opposed to this [government bailout plan] because I don't think it's necessary. I believe we could get a market solution if the government would stop pushing money at the problem. And if we need to do it, there are other ways to do it. I mentioned one.
Another one would be to make loans. Why not lend them the money and make them pay it back with interest? If they need it and they're in crisis, that's a solution. This [bailout plan] is the government protecting the private interest at the expense of the public interest, and I don't like that. And I believe that we won't have a [financial] system for very long if we allow the bankers to make the profits and the public takes the losses. I'm not against them making the profits, but they have to take the downside along with the upside.
