Topic: Finance, Banking & Monetary Policy

George Will Is on a Roll

Another great column from George Will today, on the House’s “vote against rashness.” With a conservative’s sense of history, he traces some of the policy choices that brought us to today’s crisis:

Suppose that in 1979 the government had not engineered the first bailout of Chrysler (it, Ford and GM are about to get $25 billion in subsidized loans). Might there have been a more sober approach to risk throughout corporate America?

Suppose there had never been implicit government backing of Fannie Mae and Freddie Mac. Better yet, suppose those two had never existed – there was homeownership before them, just not at a level that the government thought proper. Absent Fannie and Freddie – absent government manipulation of the housing market – would there have developed the excessive diversion of capital into the housing stock?

But really, if you haven’t been reading George Will this year–on the problems with both Obama and McCain, on the automobile bailout, on local government fiscal crises–go here. And to read what he says about his new book, go here (pdf)

Cynical Senate Vote

The Senate is scheduled to vote tonight on the Wall Street bailout package, which now includes a provision to relieve taxpayers of a scheduled $60 billion or so jump in annual alternative minimum tax payments.

House Majority Leader Steny Hoyer noted, “there’s no doubt in my mind that the Senate added this [AMT provision] because they thought that’s the only way they could get it passed.”

Thus, despite the outpouring of public opposition to the bailout, Congress is determined to rig the vote and grab the people’s money anyway it can. The Senate is essentially saying to the public: “We won’t impose a $60 billion tax hike on you next year if you let us bailout Wall Street. And don’t worry about the $700 billion, we’ll just tack that on to the $5 trillion in public debt that your children and grandchildren already owe.”

There are too many insider experts and economists driving this debate, and too little recognition inside the Beltway about the basic injustice of a bailout. As many callers to the talk shows are saying, the government wants to take $700 billion from average hard-working families who followed the rules and give it to people who made bad, irresponsible, and even disastrous decisions.

Many economists are saying: “Well, I’m usually against intervention and subsides, but this case is special.” But that’s what they always say. The hunt for supposed “market failures” is a full-time pursuit for many modern economists, and it’s mainly nonsense. Back in January the administration and many top-flight economists created a similar crisis atmosophere, inducing Congress to pass the ridiculous “stimulus” bill. What did that achieve other that putting us $150 billion further into debt?

Nihilists!

Dieter: “Ve are Nihilists, Lebowski. Ve believe in nothing! Nothing!”

–Joel and Ethan Coen, “The Big Lebowski”

“And let us recognize above all the 228 who voted no — the authors of this revolt of the nihilists. They showed the world how much they detest their own leaders and the collected expertise of the Treasury and Fed.”

–David Brooks, “The Revolt of the Nihilists,” September 29, 2008

That’s David Brooks tearing his hair out yesterday over the failure of the bailout bill.  It’s interesting that Brooks characterizes people who resist the idea of privatized profits and socialized loss as “nihilists.”  If you’re not willing to let Brooks’ “new establishment” play with up to $700 billion in tax dollars, if you don’t offer up your wallet the moment an expert cries “crisis!”–why then, you must believe in nothing! Nothing at all!

Interesting, but maybe not all that surprising.  Brooks is, after all, the architect of National Greatness Conservatism, the philosophy that says “American purpose can only find its voice in Washington.”  Inside Washington: purpose, meaning, fulfillment–glory.  Outside Washington: a vast and pitiless void.  “All within the state, nothing outside the state, nothing against the state,” as a prominent theorist of national greatness once put it.

A Constitutional Law Lesson From the Bailout Debate

The Framers of the Constitution knew that jealousies among the branches of the federal government would slow the federal decision-making process, redounding to the benefit of the people and their liberty. As important as the Bill of Rights is, the structure of government is just as important for its bias against hasty government action.

Put aside what you think of the substance of the bailout issue as you see an example of the constitutional structure at work:

Not All Banks Are Doing Badly

The Washington Post had a story on Friday pointing out that not all banks are on the verge of collapse:

Many smaller banks said they were actually benefiting from the problems on Wall Street. Deposits are flowing in as customers flee riskier investments, and well-qualified borrowers are lining up for loans.

“We collect money from local savers, and we lend it in the local community,” said William Dunkelberg, chairman of Liberty Bell Bank in Cherry Hill, N.J. “We’re doing fine. There are 9,000 financial institutions out there, and most of them are small and most of them are doing fine.”

Dunkelberg, a professor of economics at Temple University and chief economist for the National Federation of Independent Business, added that a recent survey of that group’s members found that only 2 percent said getting a bank loan was the great challenge facing their businesses.

It’s important to remember that “the financial industry” is sprawling and diverse. Some banks are on the verge of collapse. Others appear to be doing just fine. It would be unfair to these more prudent banks (not to mention taxpayers) to bail out their irresponsible competitors. And it’s a mistake to assume that, simply because a few reckless Manhattan firms have fallen, the entire financial industry is on the verge of collapse. It may be that these are simply firms that made too many bad investments, in which case their bankruptcy is precisely what is supposed to happen in a free market. Any Congressional action should be focused on preserving the health of the financial system as a whole, not at preventing the bankruptcy of individual firms that made bad investments.

Intervention Is Not the Answer

The current turmoil in financial markets is the result of bad government policy, particularly easy-money policy by the Federal Reserve and unsustainable subsidies to housing by Fannie and Freddie.

The bailout did not address these problems. Instead, it sought to compound the problem by increasing government intervention.

Ideally, politicians now will shift gears and seek to reduce government barriers to economic revitalization. Unfortunately, the political insiders from both parties almost surely will close ranks and seek cosmetic changes in hopes of ramming the bailout through Congress.

It’s Not a Pretty Picture

The failure of the bailout plan essentially shows the huge lack of confidence among the public that it would achieve its objectives. It also registers doubt about the government’s ability to implement it successfully.

The impasse shows how blunt fiscal policy is and how inept politicians are in managing the economy. The current set of problems did not arise overnight — they festered in the form of government favoritism toward housing finance companies which overextended their operations and ultimately toppled over. Now, those policies have come full circle to rest at Congress’s doorstep. Problem is, they will soon visit our doorsteps too in the form of a weaker economy.

Now that the bailout proposal has failed, Congress may seek a new approach. More likely, the existing plan will be tweaked to enable passage in a re-vote. But delay and political drama will further sap public confidence in Congress and weaken consumer confidence in the economy.

That may mean a deeper recession and trigger calls for still larger bailouts to salvage the financial sector in the future. But a larger bailout package will also be more dangerous. Larger short-term increases in federal borrowing may destabilize international capital inflows and reduce confidence in the dollar.

Overall, it’s not a pretty picture — but score one for supporters of the free market who insist on allowing market reorganization of the financial sector to continue unimpeded…albeit at high risk to the economy over the next few months.