Hold a Hearing

With so much riding on the pending bailout, I would ask Congress to hold a hearing this weekend, with two people testifying: Ben Bernanke and Roger Cole. Cole is head of the Federal Reserve’s Division of Bank Supervision and Regulation, fondly known as “soup and reg.”

Here is how mortgage securities markets could affect good borrowers:

  1. The securities lose market value.
  2. The banks mark the value of their securities to market. This eats into their capital.
  3. The banks have to cut back lending to good borrowers in order to comply with capital requirements.

To help good borrowers, you have to intercept one of these three steps. The Paulson plan and all its variants are an attempt to intercept step 1. Getting rid of mark-to-market accounting is an attempt to intercept step 2. Easing up on capital requirements is an attempt to intercept step 3.

The Paulson plan is awful. For one thing, I don’t see how the Paulson plan can really kick in for several months, because it will take that long to figure out implementation. With capital forbearance, you could have new rules up and running within a week.

Getting rid of mark-to-market is not what I would want if I were a bank regulator. That’s why I would want Cole at the hearing. Ask him: if you had to choose between relaxing capital requirements and getting rid of mark-to-market, which would you choose? If he disagrees with me, then go with what he says. Incidentally, there is an op-ed in today’s Wall Street Journal that says we should keep mark-to-market accounting.

The question for Bernanke is this: if the Paulson plan is defeated, can he do enough with capital requirements and other tools to keep money flowing to good borrowers, particularly small business? If the answer is “yes,” then I think there is a credible alternative to the Paulson plan. Wall Street may not like it, but the public will be protected from a Great Depression scenario. If Bernanke says he doesn’t have the tools to free up bank lending, and if he thinks that things are going to really freeze up for good borrowers, then I guess we have to default to the Paulson plan.

[Cross-posted from EconLog]

Some Talking Points

For not doing a bailout:

  1. We don’t need to bail out Wall Street to protect Main Street. All we have to do is make sure that sound borrowers, especially small businesses, have access to credit. Banks can do the job, although regulators may have to reduce capital requirements.
  2. The mortgage securitization industry is brain-dead. If it does not revive on its own, we should not spend taxpayer money trying to resuscitate it. The industry right now is a focal point of rent-seeking, but it has little relevance to the economy as a whole.
  3. The stock market seems to want a bailout. While I hope for higher stock prices, I think that public policy needs to take into account more than just daily fluctuations in the Dow. In 1971, the market gave a huge thumbs-up to wage and price controls, which turned out to have damaging economic effects that persisted for years.
  4. There is no reason to rush. President Bush wants to ram this through without deliberation, because that is how he operates. The Democrats want to act without deliberation, because putting the financial sector under government control is what they want. The rest of us would be better off if the issue were carefully debated first.

[Cross-posted from EconLog]

How Smart Should a President Be?

William F. Buckley famously said he’d “rather be ruled by the first 500 people in the Boston phonebook than the faculty at Harvard University.” There’s surely something to that, though the worst president in American history was a Princeton man.

Here’s an interesting graph comparing presidential success with presidential IQ. (Explanation here.) (Hat tip: Marian Tupy.)

It’s a fun conversation piece, but it doesn’t tell you much. First of all, all the conventional rankings dramatically downgrade “do-nothing” presidents, so the version of presidential greatness used is always going to overvalue drama, explosions, and ambitious plans to remake the country and the world. Note that here, once again, Warren G. Harding is the Rodney Dangerfield of presidents, ranked dead last despite his admirable record on separation of powers, size of government, and civil liberties.

Moreover, the IQ data are highly dubious, especially the further back you go in history, where it appears to be based on presidential biographies and personal papers, rather than standardized tests from college or military service. When I first looked at the graph, I wondered how they’d concluded that JFK was brighter than John Adams and James Madison, who didn’t need ghostwriters to make them seem smart. It turns out, according to JFK biographer Thomas Reeves, that “Kennedy was actually given an IQ test before entering Choate. His score was 119,” much lower than what he’s assessed at here.

In any event, given the difficulties of assessing IQ from a distance of generations, and the contentious nature of presidential greatness, it’s hard to draw any firm conclusions about the relationship between intelligence and presidential “success.”

However, too many conservatives, it seems to me, are too quick to conclude that brains don’t matter much when we’re choosing a constitutional chief executive. The reasoning seems to be: Jimmy Carter was smart, and he was a bad president; Reagan went to Eureka College and the intelligentsia sneered at him, yet he was a good president. Therefore, we should count ourselves lucky if and when we get George W. Bush and Sarah Palin. This sells Reagan short (and Carter too?): Reagan wasn’t an intellectual, but he was very interested in ideas and anyone who’s seen Reagan’s handwritten 1970s radio speeches, for example, knows that his intellect was nothing to sneer at.  His success certainly doesn’t mean that unremarkable intelligence and lack of intellectual curiousity are virtues when it comes to the office of the presidency.

The Revival of Small-Government Conservatism?

For nearly eight years, Republicans either looked the other way (or greedily joined in) as the Bush administration increased the size, cost, and intrusiveness of government. The largest increase in domestic discretionary spending since the Great Society, a massive new entitlement program, greater federal control over education — big-government conservatism was on the march with barely a squeak of protest.

But in proposing a $700 billion bailout of Wall Street, the Bush administration may finally have found the proverbial straw that breaks the camel’s back. It is years overdue, but congressional Republicans are finally learning to say “no.”  And its not just the usual advocates of limited government like Rep. Mike Pence (R-IN) who are outraged by the biggest government intervention in our economy since FDR. House Minority Leader John Boehner (R-OH), who acquiesced to — even twisted arms to push through — every big-government proposal that the Bush administration wanted, has suddenly found a spine. Even such go-along, get-along Republicans as Sens. Richard Shelby (R-AL) and Jim Bunning (R-TN) have not been able to swallow this one.  To hear Sen. Bunning describe the administration’s proposal as “socialism” is, well, amazing. 

Meanwhile, grass-roots activists and talk radio are in open rebellion. People are actually suggesting that government isn’t the solution, government is the problem. How long has it been since we’ve heard that around this town?

The Bush administration will probably succeed in pushing through their proposal. But if the bailout succeeds in finally reigniting the fires of small-government conservatism, it may be worth the price.

Mark Sanford on Bailouts

South Carolina governor Mark Sanford, who spoke last Saturday night to our Cato Club 200 retreat, has a great column in the Washington Post today on the federal government’s accelerating tendency to respond to every crisis with an expansion of its powers. He writes:

An ever-expanding scope of federal commitment and power is not what made this country great. Expanded power in one place comes at a cost in other places. American cornerstones such as individual initiative and an entrepreneurial spirit — born in free and open societies with private property rights and the rule of law — have never fit particularly well within the context of an ever-growing federal government.

For 200 years, the “business model” in our country has rested on a simple fact: that while one may reap rewards from taking risks, one should also be prepared to face the consequences of those risks. Some of the proposed actions with regard to the credit market turn that business model on its head — absolving those who took too much risk, or bought too much house, from the weight of their own choices. If Congress passes the proposed bailout, we will be destined to have far greater problems in time, leaving those who are prudent in their finances to foot the bill for those who are not.

He goes on to appeal to the wisdom of Milton Friedman, Ronald Reagan, and Edward Gibbon in cautioning Congress not to put us on the path to “decline and fall.”

Bonus: Mark Sanford on Real ID here (podcast audio), here (speech video) and here (speech PDF).

“Too Tasty to Fail”

The National Oceanic & Atmospheric Administration (NOAA) – housed at the U.S. Dept. of Commerce because Dick Nixon wasn’t getting along with his own Secretary of the Interior – has determined that the decline in the harvest of Chesapeake Bay blue crabs is a “commercial fishery failure.”  With that declaration by the “stewards” of the nation’s fisheries, Chesapeake crab fishermen are looking at a bailout (popular word these days) of up to 15 million taxpayer dollars over the next three years.

The Examiner reports that Maryland Watermen’s Association President Larry Simns and his members were “elated.”  Go figure.  Simns says that this is not a handout because the money would be used to put the crabbers to work restoring fisheries, planting trees, etc.  Perhaps they can staff the exhibits at the NOAA-partnered Smithsonian Institution’s “Ocean Hall” opening this weekend too.

What kind of message does this latest government intervention send to other commercial fishermen?  Overfish, deplete your source of income, and the taxpayer will numb your pain.  Of course, NOAA bureaucrats will then cite resulting fishery depletions as justification for a budget increase.  Big Government 101.