Government bailouts are hurting chances for economic recovery, argues William Poole, former head of the Federal Reserve Bank of St. Louis in an editorial in The New York Times.
“Instead of more bailouts, we need a clear and consistent path to fundamental reform of our financial system,” writes Poole.
Instead of stimulating recovery, government spending will lead to higher taxes and a larger deficit. Government management of companies like banks and car makers will also delay recovery, Poole contends.
Instead of meddling in running businesses, the government should enact tax incentives to encourage investments in factories and equipment, Poole argues.
Those kinds of incentives kick started the economy in the Kennedy-Johnson era and again under Ronald Reagan.
The Fed’s rock-bottom interest rates is another powerful tool for promoting a recovery, according to Poole.
Warren Buffett, chairman of Berkshire Hathaway, has supported federal interventions but agrees bailouts are giving the wrong companies competitive advantages.
Companies using bailout funds enjoy lower borrowing costs, while well-run AAA-rated companies with few bad loans must borrow at higher rates.
“Though Berkshire’s credit rating is pristine — we are one of only seven AAA corporations in the country — our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing,” Buffett wrote in his annual letter to Berkshire shareholders.
“At the moment it is far better to be a financial cripple with a government guarantee than a Gibraltar without one.”
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