Thursday, September 25, 2008

The Bailout: A Pattern Emerges

There are now oodles of articles about the bailout plan, both pro and con. Despite my personal opposition (and that of most Americans per polling), Congress seems poised to pass some form of the bill within the next few days (if not in the next few hours).

Yesterday, the Wall Street Journal editors laid out their support of the general bill, adding a few suggestions about certain details. On the same page, several respected financial big wigs expressed their concerns, but ultimately suggest that it could work if these issues are properly addressed. Even some hard core conservatives are saying that there is apparently no other way to deal with the financial crisis (see NRO article).

While some argue that this plan will actually turn a profit for taxpayers over time, the guys that ran the Resolution Trust Corp and the FDIC during the Savings & Loan bailout point out some realities that nobody else seems to be talking (or even thinking) about. And these guys at least have some experience in managing something similar to this proposed bailout.

Conservative U.S. Senator Jim DeMint (R-SC) has been an outspoken critic of the bailout. While others are warning of a massive recession if we don’t immediately cede great powers to the Treasury, DeMint warns:
“This plan will not only cause our nation to fall off the debt cliff, it could send the value of the dollar into a free-fall as investors around the world question our ability to repay our debts. It's also very likely that this plan will extend the cycle of bailouts, encouraging other companies to behave in reckless ways that create the need for even more bailouts, triggering an endless run on our treasury. This plan may make things look better for Wall Street in the next couple months, but the long-term consequences to our economy could be disastrous.”
DeMint goes on to suggest that there are “much better ways of dealing with this problem than forcing American taxpayers to pay for every asset some investor doesn't want anymore.” He wants a more comprehensive approach that addresses the underlying causes of the problem and institutes “pro-growth reforms.” Besides, he has said that it is ridiculous to entrust the same people that created this mess with cleaning it up. The government simply doesn’t have the capacity to do it, he argues.

The editor of the Myrtle Beach Sun News says DeMint’s plan is “faith-based,” in that no one can say for sure whether it would really work. But he also notes that the Bush plan is also in the same boat. He writes:
“It all comes down to what kind of people we are. Are we Americans semi-shorn sheep, hoping that the gurus can save us from the chaos wrought, at heart, by the foolish belief that housing prices would always rise? Are we content to let the government, in effect, reward bad behavior by sparing us further losses on our home equity and our stock portfolios?

“Or, as DeMint and his cohorts are hoping, are we willing to risk a private-side solution that relies on the increased certainty of profit to draw fresh private money into the financial system? If we're really the democratic-capitalist true believers we say we are (at least when times are good), as he sees it, we should give the markets the tools they need to fix themselves then stand back and watch it happen.”
DeMint isn’t the only voice out there proposing alternatives to the bailout. Even radio financial commentator Dave Ramsey offers a solution. Deroy Murdock writes that “there actually are desirable alternatives to building socialism and saddling every American man, woman, and child with another $2,300 in unjustified federal spending.” He outlines a cogent free-market alternative that some “practicing Reaganites” offer that won’t put the taxpayers deeply in (further) hock.

Despite these voices, I’m not holding my breath waiting for the Beltway crowd to actually pursue any of these avenues. They do not really believe in the free market (other than as a name for big businesses that give them cash in return for policies that create barriers for their competition). They obviously believe in Big Government. And they believe that, despite the unpopularity of the bailout plan, it will help them win their next election.

An anonymous commenter on Frank Staheli’s post about the bailout debacle writes that “the most striking in all this ordeal is not that our government, or our representatives are against their electorate but the ultimate impotence of the same electorate.” To the commenter, this is evidence that we are actually living in a feudal system. Others may look at this and conclude that it is evidence of a republic. (Do average Americans even know enough civics to know the difference?)

Regardless of what I or others that oppose this bailout think should happen, it seems almost certain that we will all be living with the results of the bailout for a long time to come. And I believe that means that the bailout will ultimately cause another crisis down the road a bit due to the law of unintended consequences. But don’t worry. Our political class in that day will swoop in, claiming to be the heroes that can solve that crisis. It’s a self-perpetuating pattern.


Reach Upward said...

The WSJ Editors today are backing off on the Paulson plan (see here). Now they say that companies that are deemed essential to a healthy economy, but that have no capacity to raise private capital should be treated just like Freddie Mac and Fannie Mae.

That is, the $700 billion should be used to buy preferred stock in these companies, and "managements of these companies [should be forced] to leave and forfeit the compensation packages they [have] negotiated."

They forecast that under this plane, "The financial market is stabilized, companies get recapitalized, failures are avoided, debt securities are supported, and time is gained for illiquid assets to mature. ... The only difference is that potential losses are kept with the shareholders where they belong."

While I don't favor the $700 billion bailout, the WSJ Editors' suggested plan makes much better sense than the Paulson plan.

Frank Staheli said...

It's important for everyone to understand that this economic collapse is in no way an indictment of the free market. The market has not been free for years. It has been, rather, a collusion of government with their capitalist friends. Several of these people, just like Enron executives, should be going to jail, but hardly anyone is talking about that.

I agree with Senator DeMint, as well as Representative Ron Paul, two of the very few intelligent people in Congress today. A bailout would indicate to the rest of the world that America has no integrity when it comes to financial responsibility.