Mark Levin has a must-read piece on the bailout over at NRO:
I have read the posts here and elsewhere. Sometimes these things are made to look more complicated than they really are. From an economic perspective, if the problem is liquidity and credit, there simply is no need for the federal government to assume massive amounts of debt on its book by assuming loans in anticipation that their holders or borrowers will default. This seems to me like a brand new expanse of government power that is not justified (if it ever is) by the arguments made on its behalf. The government controls monetary policy through supply and interest rates, among other things. It can further ease money supply and credit, thereby increasing the flow of capital. The government controls tax policy. It can increase liquidity and the flow of new money into the economy both from within the country and from foreign sources by eliminating the corporate income tax and the capital gains tax even on a mid-term basis. No matter what is done, some financial institutions will fail, as they did in the 1981-82 recession and have since. And the Fed and Treasury and other instrumentalities of government will have to determine, on a case-by-case basis, whether to intervene and how to intervene. They will also have to determine whether other policies require modifying, such as the McCain proposal today, in which he suggests increasing federal insurance for individual depositors from $100,000 to $250,000. Other smart suggestions include modifying the mark-to-market rule requiring financial institutions to downgrade the valuation of assets. If the goal is to prevent panic in the economy by investors and depositors, then increase credit, liquidity, and the flow of capital, and deal with problem institutions that are significant enough in size that their demise could resonate to the wider economy. But the Soviet-style, top-down five year plan a la Paulson’s proposal, and to a significant extent the proposal that was voted down yesterday, could easily do more damage to both the economy and our governmental structure. So, in this respect, I must depart from NRO’s editorial.
Also, count me among those few here who want to thank the House Republicans for taking a bold stand against what had been a stampede on a scale I have never before witnessed on matters of huge consequence. Conservatism is more than a quaint belief-system to be embraced and debated over donuts at Starbucks. It is more than a list of talking points. It is the foundation of the civil society. The liberal uses crises, real or manufactured, to expand the power of government at the expense of the individual and private property. He has spent, in earnest, 70 years evading the Constitution’s limits on governmental power. If conservatives don’t stand up to this, who will? If they don’t offer serious alternatives that address the current circumstances AND defend the founding principles, who will? The House Republicans have done both. And I, for one, thank them.
Incidentally, if you want to buy a home or car today you can. And if your credit is decent, you can get loans at a good rate. Last week we were told that if a deal was not struck by last Friday, our economy would collapse. It has not. That is not to say the evidence of economic troubles or worse should be ignored. It is to say that now is a time for reasoned decisions based on tried and true principles, not for abandoning them. I notice that the socialist, who, for the last 30 years, has insisted that private institutions make risky loans based on non-economic factors, still has not abandoned his policies. Socialism does not work. We shouldn’t support more of it.
It’s been 24 hours since the bailout failed and still no Hoovervilles. Someone on this site who understands economics needs to seriously explain to me why this thing is even needed, and why what Levin is proposing regarding liquidity and credit won’t suffice. Because to my untrained economic eye, it seems that the bailout panic has a lot to do with a few people trying to get the rest of us to bail them out of bad risks they took, and very little to do with the health of our national or global economy. Sorry Wall Street, but I’m not paying for your mistakes unless you pay for mine, and trust me, nobody’s paying for mine.
If no bailout goes through and the economy doesn’t crash, then the attempt to add a trillion dollars to the national debt to bail out the few will be downright sinful, and in a more civilized society would have resulted in folks going to the guillotine.
Where am I wrong? Tell me in the comments section.
September 30th, 2008 at 2:22 pm
Dave,
It’s not like the American Economy will collapse overnight. But if nothing happens, a lack of liquidity will dry up business in the country. No business loans, lines or credit, etc…
The reason people wanted the bailout to happen on Monday is that the more Congress argues about it, the less likely it is that a compromise will be reached.
How long will we last if banks refuse to lend money to us or each other? A week? A month? If there is no money to do business, there is no business.
September 30th, 2008 at 2:26 pm
I’m no fan of the bailout DaveG, but I can understand why it is being pushed. I am speaking as an investor who has lost a significant amount of money recently. Please understand one thing, the Great Depression started because too many banks and financial institutions failed. The gov’t did nothing as these banks failed in the 1930s.. Banks are now failing today. These banks are significantly larger than anything we hand in the 1930s. If the gov’t does nothing and allows too many of these banks to fail, guess what? It is depression time all over again.
I don’t like it, but that is the way it is.
September 30th, 2008 at 2:34 pm
If what posts 1 and 2 say is true, and I have no reason to doubt them, then I’ll probably support some of the more “liberal” solutions. Which is to say that the people who caused these banks to fail should be terminated immediately with no severance pay and no retirement benefits. I used to think that letting bad businessmen fail was a conservative principle, but apparently not in GWB’s America.
September 30th, 2008 at 2:38 pm
I agree with the two previous comments. I was actually out there protesting the bailout over the weekend, but then Wachovia collapsed, banks in England, Ireland and Iceland failed and Fortiss Financial collapsed. A lot of smaller lesser known community banks are also failing (the lifeline of small towns).
It looks like life is proceeding just fine when we look out our windows, but the truth is far different. Everyone must hold their nose and support the bailout and even then we have to pray it works.
September 30th, 2008 at 2:44 pm
Eric:
“that the people who caused these banks to fail should be terminated immediately with no severance pay and no retirement benefits.”
I agree, but let’s not forget about the loan defaulters which too few mention. There are at least two parties to any contract. The pain is being caused by those who are defaulting and not paying their bills. That does not mean that the banks are 100% at fault. If people would pay their bills & live within their means, we would not be in this mess. The banks share some blame for making loans that probably should not have been made in the first place. But in my mind, the primary culprit is the gluttonous American living way out of their means over consuming.
Where is the call for individual accountability and fiscal responsibility?
September 30th, 2008 at 3:03 pm
DaveG,
You are absolutely right that what Levin suggests would probably work. In fact, I believe it would be a much more successful and more conservative solution, however it has no chance of passing.
Thanks to our socialist President and Paulson, the starting point was not cutting taxes, expanding the FDIC guarantee, increasing liquidity and performing targeted interventions. Instead the starting point was to make Paulson a financial dictator with a $700 billion budget.
Bush screwed us again by not starting the negotiations with Congressional Dems from a conservative viewpoint. He left House Conservatives out in the cold without even a seat at the table until McCain spoke up for them.
September 30th, 2008 at 3:03 pm
1. It seems to me that the failure of banks was “solved” by creating the FDIC.
Should any more banks fail, it seems to me they can be bought by other banks (like WaMu and Wachovia have been). If absolutely no one will buy, presumably the FDIC will step in.
So if bank failures are the only problem, I can’t see why we need a 700 billion government bailout.
2. Some say the government can make money by buying this bad debt and later liquidating it. If the government can make money, so can the private sector. So let the private sector do it.
3. If there is money to be made lending money, someone will lend it. Maybe not the bank you are used to using. But someone will be lending.
September 30th, 2008 at 3:06 pm
I reluctantly supported the House passing the rescue package on Monday, but I’m now against a renewed effort.
The problem is how the Congress works: A hurried bill is general enough to allow flexibility. But now that they have time to hear from their lobbyist sponsors, I’m confident that the bill will be get stuffed like a Christmas turkey with all sorts of lavish nonsense having nothing to do with the credit crunch.
Watch as our legislators start telling us how every government and legislative action serves to shore up lending.
September 30th, 2008 at 3:13 pm
5 cwpete
BINGO!!
I have seen friends/neighbors take out second mortgages and use up their home equity just to purchase flashy/luxury cars, take vacations, etc. Most kept thinking the value of their homes would continue to feed their greed and many times I heard lots of bragging at neighborhood parties/cookouts to this extent. There has to be individual accountability! That being said, not all people spent irrationally, some people got screwed by predatory lending and now are losing their homes, those are the people I feel sorry for. Not sure what the answer to this mess is. If credit dries up the economy will go into a deep depression, I don’t think that will happen but I’m not naive enough to think that it wont.
September 30th, 2008 at 3:14 pm
DaveG,
“If no bailout goes through and the economy doesn’t crash, then the attempt to add a trillion dollars to the national debt to bail out the few will be downright sinful, and in a more civilized society would have resulted in folks going to the guillotine.
Where am I wrong?”
In suggesting the guillotine…
“That’s money laundering. That’s not minimum-security, conjugal visit prison. That’s federal, pound-you-in-the-a$$ prison.”
September 30th, 2008 at 3:14 pm
cwpete,
With all due respect, oversimplification of the Great Depression’s causes does no good. From your perspective it may have started with the collapse of banks, but history tells a different story…much more complex than what you lay out.
Name one person you know of who has not been able to withdraw money from their bank account. You can’t. In the early 30′s people couldn’t retrieve money from banks with which they had accounts. The FDIC has not had to make payments to depositors of failed institutions because these institutions have not failed. They may have needed to be bought out, but they have not collapsed.
The Government attempted to do things to prevent an economic meltdown in the 30′s but their attempts were ill-advised and unsuccessful. This to me is the argument with our current course of action. The Government is attempting fixes, but without reasoned, logical dialogue and without the implementation of the best solution, we risk the same result and the loss of an additional $700 billion or worse yet the loss of the American way of life and free market principles.
The battle right now is not whether or not a fix is necessary, it is what is the best fix and the $700 billion dollar bailout was not the best fix. The American economy will not collapse in a week, therefore, carefully thought out and applied policies must win the day if we are to achieve the best possible outcome.
I feel for your loss and truly hope that you are still able to keep you head above water. This will be a tough time for many, as any recession is.
Best regards,
TC
September 30th, 2008 at 3:16 pm
Marie, a few comments:
1. It seems to me that the failure of banks was “solved” by creating the FDIC.
Bank failures were not “solved” by FDIC. Banks still fail who are FDIC insured (case in point, WaMu and Merril Lynch to name a few). The FDIC was put in place to protect the depositor from banks failing up to 100K. It used to be that your savings would be wiped out when banks failed. That changed after the gov’t instituted the FDIC program.
So if bank failures are the only problem, I can’t see why we need a 700 billion government bailout.
The bank failures are large enough to warrant the 700 B package. It may even need more!
2. Some say the government can make money by buying this bad debt and later liquidating it. If the government can make money, so can the private sector. So let the private sector do it.
If that were true, I’d have my very own dollar printing press in my basement going non-stop.
3. If there is money to be made lending money, someone will lend it. Maybe not the bank you are used to using. But someone will be lending.
Not if all the money is already tied up in existing loans and other investments. This is exactly why there is a credit crunch. There is simply not additional funds to have new loans with to grow the economy.
Ugh, I hate to have to defend this stinking $700B bill. I’d almost rather defend Obama than defend this thing..
September 30th, 2008 at 3:17 pm
CWPETE,
I agree 100%, but the citizens who took out the bad loans are by and large already taking the punishment for it. The have no cash, and that is why they are in trouble. I find both parties equally culpable, but in the end if someone should be bailed out it probably should not be the pigs on wall street who knew what chances they were taking (or certainly knew what rewards they were reaping) and are now holding their hand out.
I (along with true conservatives) scoff at people looking to the government for handouts, but it makes my blood boil when millionaires do the same. The only way to let the market fix this is to let the market fix this. And that means punishing those who were wrong, and rewarding those who were right. I believe that about Joe Blow down the street who only wants to do a job, so I certainly have to think it applies to the top executives of Wall Street Banks.
Save the bank if you must, but certainly don’t save the men who failed in the free market. Bankrupt them.
September 30th, 2008 at 3:19 pm
Dave,
I know this comment is a bit long, but please read this:
The bailout is not only an unconstitutional heist, it will only severely exacerbate a recession that is inevitable and necessary.
Interest rates are market signals that businessmen need to look at to know how and when to invest for the future. If interest rates are high, businessmen know that they will not be able to afford to take out lots of loans in order to invest in their enterprise. If interest rates are low, businessmen know that they will be able to take out loans in order to invest in their enterprise.
However, when one group uses illegitimate force to obtain a monopoly over the production of a certain good, it distorts and destroys market signals, which everyone realizes is exactly why socialism always fails. People who realize this fact about socialism don’t, however, apply it consistently to the production of money, which is just as much a good as wheat, furniture, and cellphones. So when a government forcibly obtains a monopoly over the production of money/credit (i.e. the Federal Reserve), they have no way to know how much money/credit the economy actually needs, so they end up guessing. Inevitably, their guess will be off target, leaving the market with too much or too little money/credit (almost always too much, seeing as inflation is such an easy way to create artificial wealth, and seeing as it is extremely profitable for a government at the expense of its citizens). However, when the Federal Reserve has an easy credit policy, it distorts interest rates–the market signal businessmen need to look at to know how and when to invest. This causes businessmen to malinvest in the wrong lines of things.
As long as these market signals remain distorted due to the easy credit policies of the monopolistic Fed, businessmen make clusters of errors, and malinvestment continues to pile up. Market corrections then become necessary. Firms who are using resources unprofitably by investing in the wrong things need to be allowed to fail. When they fail, this clears out all the bad debt, cleans out the malinvestment, and releases resources to be picked up by more efficient firms.
“Recession” is the name that has been given to these market corrections. Recessions are not supposed to be prevented. They are a very unfortunate and painful consequence of socialist monetary policy (Plank 5 in the Communist Manifesto), yes, but large-scale failure of these inefficient firms, clearing out of bad debt, and diversion of resources into more efficient lines of production is absolutely essential to economic recovery and growth. The wisest and most prescient economists, from Ludwig von Mises to F. A. Hayek (who won a Nobel prize in economics for explaining the very business cycle theory I am now explaining) have always said that the best way to get out of a recession is to let it happen and let it do all it needs to do, with as little impediment as possible.
By flooding the market with more easy credit (as the Fed just did the other day, with a $630 billion surge), the Fed is only keeping interest rates (market signals) distorted, causing MORE malinvestment to pile up, meaning the inevitable recession will have to be an even longer and deeper cleansing than before. And by forcing scarce resources (like capital and money) to stay in firms that use resources inefficiently and irresponsibly–and moreover, by stealing $700 billion worth of resources from efficient and responsible resource-users and giving it to these firms that would not be able to survive if left to the free market–we are literally forcing resources to be employed less efficiently rather than more efficiently, which sage economists throughout the ages such as Frederic Bastiat and Henry Hazlitt showed time and time again is nothing more than the destruction of wealth. Destroying wealth can NEVER improve an economy.
As far as lines of credit drying up, what people who talk about this ignore is that if some firms are left unable to make loans to entrepreneurs, that is a profit opportunity for SOMEONE ELSE, and an enterprising profit-seeker will eventually step in.
Yes, there will be a time where the market liquidates the bad debt, corrects the malinvestment, and rediverts resources to more efficient firms, and this will result in hardship for many people. However, this bailout is nothing more than an attempt to escape the unavoidable consequences through more of the same thing that necessitated these consequences in the first place.
September 30th, 2008 at 3:20 pm
My point is not that a business failure should mean bankruptcy. My point is that if we need to bail the banks out, that is fine. But do not bail out or give any sort of severance to the executives whose terrible risky decisions with our nation’s finances led to this.
September 30th, 2008 at 3:20 pm
I like how everyone who derided Bush’s “Rush to War” is now falling all over themselves to pass this or another bailout bill.. to the tune of $700 Billion dollars – a number which Poulson pulled out of the air… There is no data point upon which they based that $700 Billion amount – they said so themselves!
what a joke that NOBODY is raising this point about the $700 Billion. Not a word in the debate about why that amount? Not a word in the media about why that amount? Nare a word online about why that amount?
Even as part of the ‘rush to war’ Powell marched to the UN and produced pics of WMD trucks and other stuff, but with this ‘rush to bailout’, we don’t even get a half baked powerpoint justifying the amount or laying out a logical connection to what $700 Billion gets us and why that amount. Why not more or less?
What a joke this all is
September 30th, 2008 at 3:42 pm
Evil Conservative:
You get props for being the first commenter to reference Office Space on R408!
September 30th, 2008 at 4:10 pm
From NRO:
September 30th, 2008 at 4:22 pm
#13 eric, we are in total agreement.
I’d like to point out one other thing. “Pings on Wall Street” are not getting bailed out at all here. They are more than taking their lumps.
The share holders (owners) of Bear Stearns (and I had lots of Bear Stearns), Lehaman Brothers, Washington Mutual, Freddie & Fanny, AIG, Merril Lynch, among others have seen their investments drop over 97%. There is no talk (and there should not be) of any sort of “bailout” for them to cover their losses. That is the risk an investor assumes when they invest. Sure some directors stole from their companies by over inflating assets to boost their bonuses etc.. but that is a different matters. Most owners (share holders and other investors) are taking their lumps.
There is a difference between “bailout” and preventing from failing. I think the phrase preventing from failing better describes the situation. However, the media and the gov’t like to use the term bailout because it shifts the blame the share holders / owners which is politically expedient.
September 30th, 2008 at 4:32 pm
I think it’s naive in the extreme to think the market is just fine and is “working itself out” at this point (the market isn’t being allowed to work efficiently, so how could it?). I’m also skeptical that this bailout plan is the one and only approach to take to alleviate the problem, or even that it WILL alleviate the problem.
What’s my point? Those two options appear to be 80%+ of the arguments being made both here and in DC. Is it just the political reality that keeps us from seriously discussing other options, instead trying to quickly spend some absurdly high unknown amount of money (Sec Paulson admits $700 B is just a made up figure) so the voters might not realize who saddled them with the largest addition to the nat’l debt I can think of?
September 30th, 2008 at 4:44 pm
The idea that House Republicans are the heroes of capitalism is (expletive deleted) joke.
They seriously proposed a new federal insurance scheme for mortgage backed securities. So instead of a short-term plan than involves no new government ownership of financial institutions, we get a new regulatory schema (make no mistake the FDIC is a regulatory agency with the power to steal banks from the shareholders as it sees fit) that will last indefinitely. This scheme will also tax capital (in the name of “insurance premiums”)…
This isn’t the free market at work.
It also doesn’t solve the problem. Which is not IMO liquidity, but capitalization. I detest the demagoguery that holds the Paulson plan is “socializing risk”. Number one: it doesn’t: the banks took the risk and have lost money. Number two: the FDIC socializes risk and so would the House Republican’s alternative.
I further note here that when I read the 106 page draft of the plan on Sunday, it contained every single element of the House GOP Alternative… the insurance, the mark-to-market, privatization of Freddie, Fannie, AIG, etc. every element.
This is all political posturing by people who should be acting in the public interest.
Most of the people posting on this site need to come topside and get whiff of the fresh air.
September 30th, 2008 at 4:48 pm
First off – alot of the ‘frozen’ capital out there exists right now because everyone is waiting for the bailout. Why sell these bad assets at .20 on the dollar when the government may start buying them at .65 on the dollar? These companies are waiting for government to do something one way or the other. These assets have value. Someone will buy them based on that value but the companies that hold these assets won’t sell because they are waiting for the government to offer higher then market value for them. Government created this problem and now government is making it worse because congress can’t pass a bailout but everyone expects there to be a bailout.
September 30th, 2008 at 4:50 pm
Richard M,
Is there anyone out there who says the market is just fine and is working itself out?
September 30th, 2008 at 5:06 pm
Goldwater, let me rephrase. I meant that some say doing nothing will have short-term pain, but lead to a healthy economy after it finishes.
September 30th, 2008 at 5:10 pm
Richard M,
And they’re absolutely right.
September 30th, 2008 at 5:12 pm
Further, that statement in theory is perfectly true and indicative of what needs to happen. However, as you’ve noted repeatedly, there are distortions in the market that prevent a full and true cleansing effect from taking place. Hense I’m saying that’s not realistic in this case.
September 30th, 2008 at 5:14 pm
Opposition to the bailout for McCain is the biggest political gift for a candidate ever. He needs to seize it.
September 30th, 2008 at 5:22 pm
Richard M,
There are distorted market signals (interest rates) which cause businessmen to make errors and malinvest, creating bad debt and inefficient use of resources, yes. These distorted interest rates are the result of the Federal Reserve’s monopolistic manipulation of the money supply.
In the same way that a socialist economy is doomed to failure exactly because the State can never really know how much wheat, furniture, or cars a country needs (only a free market can correctly decide that), in precisely the same way a socialist monetary system is doomed to failure exactly because the State can never really know how much money and credit an economy needs (only a free market can correctly decide that). It was the Fed’s easy-credit (so easy that with inflation factored in, interest rates have actually been negative) policies that caused all this malinvestment.
Flooding the financial markets with more free money can ONLY cause more malinvestment, and taking resources from responsible and efficient resource-users and giving it to irresponsible and inefficient resource-users is merely forcing resources to be employed less efficiently rather than more efficiently, which is nothing more than the destruction of wealth. It is Frederic Bastiat’s Broken Window Fallacy to a T.
September 30th, 2008 at 5:29 pm
I’m not disagreeing with you that a recession is necessary to clear out this mess. Let me use an analogy to make my point: You get cut and it gets infected while you play in the dirt (bad money policy is employed and it causes a recession). You go to the trouble of cleaning out the cut and curing the infection (you endure the recession), but you fail to put a bandaid over the cut to prevent further infection (you don’t change the bad money policy that caused the problem in the first place). Yes, you feel better for a little bit, but it’s going to get infected again, and you’ll have to clean it out again and again until you wise up and keep it covered.
September 30th, 2008 at 5:32 pm
Richard M,
Your analogy is spot on. We need to make sure this doesn’t happen again, which means letting the market set interest rates from now on, not a socialist technocracy of unelected bureaucrats. That will ensure that the economy has the right amount of money and credit, and will clarify the market signals like interest rates so that businessmen have a much better idea of how and when to invest.
September 30th, 2008 at 7:17 pm
Nigeria has 100% pure capitalism. How well is that going for them? There don’t have strong institutions like church, a healthy financial system, integrity in the courts, traditional marriage.
Capitalism flourishes because of the strength of these institutions. Financial markets need confidence. If the entire market is frozen there is no weeding out a segment of bad actors. It’s going to weed out the entire financial institution. The first thing go will be jobs and they will vanish quickly. Then capitalism with a fundamental institution will then take on the traits of Nigerian type of capitalism.
Save the “entire” financial institutions with as many as possible market based solutions. Allow the government to set up a fund be a player in the real estate market and let the American public get an equity share in that fund.
September 30th, 2008 at 7:18 pm
*without a fundamental institution
September 30th, 2008 at 7:52 pm
nowandlater,
It might be good if you knew what you were talking about, before you started talking.
Educate yourself.
September 30th, 2008 at 8:05 pm
No, maladroit, they do not. Free markets require rule of law. We used to have the rule of law here once. The final nail in its coffin will be when Congress votes bankers who made bad decisions a US$ trillion dollar subsidy. This is they very definition of corruption, and you support it. Welcome to the largest banana republic in the world, the USA.
http://www.cnn.com/2008/POLITICS/09/29/miron.bailout/index.html?iref=mpstoryview
September 30th, 2008 at 9:03 pm
#33,
Thanks, it looks like Nigeria has less regulation than we do for foreigners doing business here. That’s was educational.
October 1st, 2008 at 3:57 pm
nowandlater,
Like I said before:
Know what you’re talking about, before you start talking.