Heritage Foundation – Eight Principles for Bailouts
2008 September 23
The Heritage Foundation was nice enough to share their thoughts in an email and link:
Now that a massive bailout of Wall Street is being debated, Heritage Foundation economic experts have laid out eight goals and strategies for lawmakers to keep in mind as they evaluate the proposed legislation.
- Do not prop up failed or failing institutions. Government should not try to keep failed businesses afloat; instead, as with Bear Stearns, they should “ensure that they are restructured or wound down in a way that does not cause undue disruption in the financial system as a whole.”
- Do not try to support prices. “Policymakers should not attempt to keep stocks or housing prices from falling to their proper market-determined levels.”
- Do not allow the government to become the permanent “owner of last resort.” Any assets the government buys should be disposed of as expeditiously as possible.
- Strictly limit legislation to the immediate need to stabilize the financial situation. “Lawmakers should oppose any and all attempts to expand the legislation being proposed” into a bonanza for special interests or pet liberal causes.
- Avoid “moral hazard.” Policymakers must discourage others from seeking government support by ensuring businesses receiving taxpayer funds have “skin in the game” and suffer the consequences of their miscalculations.
- Carefully define the Fed’s role. The Federal Reserve must avoid “unwarranted mission creep” as it exercises its “lender of last resort” responsibilities to ensure liquidity.
- Limit taxpayer exposure and keep actions temporary. “Any new mechanism or authority to halt the deterioration in the market should ensure that affected firms pay a cost and be strictly limited in time and scope to minimize taxpayer exposure.”
- Assure liquidity in markets but require full pricing of government insurance. As it considers providing insurance to money market funds, “the Treasury must ensure that the price of that insurance fully reflects the market risk.”
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