The Issue: George Bush has proposed a $700 Billion spending bill that will be used to bail out troubled United States lenders. According to National Public Radio (NPR), Congress is also considering raising the cap on the National Debt from $10.6 Trillion to $11.3 Trillion. Is President Bush’s proposed bill the appropriate policy to deal with the current problems in the lending market?

The United States’ National Debt is one of the major concerns developing out of this economic situation. The Presidents website shows a graphic representation of the state of the National Debt (as a percentage of GDP). During George Bush’s time in office the debt has already developed quite a bit. This is due to his investment in larger government and the cost to fight the wars in Iraq and Afghanistan.

This lending market crisis could potentially increase this percentage further if the Federal Government continues to buy out the bad debt developed by private lenders. But who is to blame for this buyout and what are the costs?

According to the NPR’s broadcast featuring commentary from Treasury Secretary Henry Paulson:

“Paulson and President Bush have argued that the alternative would be credit markets that remain frozen, meaning that businesses will fail because they can’t get the loans they need to operate and the economy will grind to a halt because consumers, who account for two-thirds of economic activity, won’t be able to get the credit they need to keep spending.”

This buyout is caused by the inappropriate and risky investments that are being taken on by these banks. They are the ones who loaned money to sub-prime home buyers without verifying income levels. They were perfectly happy collecting the profits in the years leading up to this recession, but need a government bailout when they are doing poorly.

Paulson argues that the solution to help the economy is to bail out bad lenders so that other people can borrow more money from them. What happened to measuring our GDP in actual dollars earned, rather than lent dollars? Over-borrowing and over-lending created this problem. This solution is like treating a hangover with another drink.

The Solution: Survival of the fittest.

The banks who chose not to make high-risk investments will live through this recession, the banks that tried to make high-risk investments to reap high profits will file for insolvency. Think of it like evolution (or a free market economy, whichever suits you). If we didn’t bail out the airline industries, we would all be flying Jet Blue right now. Is that so bad. New banks will start up to replace the old ones. Hopefully the new banks will be smarter lenders and survive the next recession.