Monday, September 29, 2008

A 'No' Vote Is The Opposite Of Irresponsible

The Corner:

I respectfully dissent [Andy McCarthy]

I do not understand why those who've voted no should be labeled "irresponsible." The senate evidently will not deign to take up this crisis legislation until Wednesday. Meanwhile, even if you don't reject the bill on philosophical grounds (see e.g., Dick Armey's article on NRO today), there is massive room for improvement. Why not take the time to try to improve it?

This was a terrible bill. To take just a few particulars, why is there no reform of the government interventions that got us to this point in the first place? Why aren't Fannie and Freddie being wound down — even after we've now had to make explicit the implicit, disastrous government guarantee? Why is Pelosi saying (as I noted in an earlier post) that the authority in the bill will allow the Treasury Department (perhaps soon an Obama Treasury Department) to take bad debt off the hands of mismanaged state and local governments?

Why don't we have a firmer formula for how Paulson (or, again, an Obama Treasury Secretary) will determine the value of the toxic debt before the government starts throwing money at it. Now, I've heard all the arguments about how, for the bailout to "work," a premium above current value would have to be paid. Even if I accept that as true for argument's sake, however, are you telling me I am wrong to worry that this bill gives the Treasury Secretary unduly wide latitude to feed taxpayer money into businesses that should fail because they've been irresponsibly leveraged and utterly mismanaged?

Why does the government have to buy the securities? If liquidity is the problem, why can't it make money available for loan, taking back collateral, placing the risk on the bad actors rather than the taxpayers, and letting market set a reasonable price for the bad debt by auction and other conventional methods. Most people will pay their mortgages so these "troubled assets" still have significant value. And there are buyers out there. The troubled entities are not selling at the price the market will bear because they (understandably) think they will get a wildly inflated price from the government — once again, perverting the market: penalizing responsible actors, rewarding the bad actors who brought us to this point, and keeping those bad actors in business.

Even as this deal has been negotiated, the market is carrying on. AIG worked out an enormous loan because it was better to nationalize it than let it fail — but at least taxpayers were protected. Lehman did not get the same deal because it didn't rate it ... and it failed. WaMu and Wachovia have been swallowed by JP Morgan and Citigroup. (See David Reilly WSJ analysis discussing how the JP Morgan/WaMu deal shows the system is working.) Central banks are acting to pump liquidity into faltering institutions in Europe.

Governments are obviously fully capable of expending tens of billions in taxpayer dollars even if Congress does not pass a sweeping bill — indeed, the real cost of nationalizing Fannie/Freddie may dwarf the $700B at issue in the failed legislation. But if these gargantuan expenditures are done on a case-by-case basis, less government intervention will be necessary and what intervention we may have to have will get appropriately high levels of scrutiny — with no blank check for the Treasury. Each new incident will remind voters that the policies of the nineties and the fraud at Fannie and Freddie were significant contributors to our woes, and Democrats will obviously not like that. But that's as it should be — our elections should be a referendum on the policies of the Clintons, Obama, Dodd, Frank, et al.

Does anyone doubt the truth of the following statement in the aforementioned Armey piece today:

Granting the Treasury broad authority to buy troubled assets from private entities poses a significant threat to taxpayers and fundamentally alters the relationship between the private economy and the federal government. Despite the sweeping breadth of the proposed bailout, there is virtually nothing in the bill that addresses the underlying problems that created the housing bubble and the oversized and over-leveraged financial services sector that grew with it. Taxpayers have become Wall Street’s newest financier, with little more than a promise — and a report to Congress on “regulatory modernization” — that Congress will not let this happen again.

FWIW, I think Armey is right about this, and it scares the daylights out of me. Of course, an economic meltdown caused by a drying up of credit scares me, too. But why should I assume the latter problem is necessarily worse than the former? I understand the impulse to obsess over the pain and potential catastrophe staring us in the face, but what if the wages of drastically altering the capitalist system that has been our engine of freedom are decidedly worse?

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