Bigger, Faster Legislation Is Not Better

A friend of mine once complained that our form of government is often far too slow in responding to issues. I answered that there are plenty of dictatorships where things get done rapidly.

Our Founders intended for government to be a thoughtful, deliberative process. It has been my observation that, except for a small handful of instances, we create bigger problems when everyone in Washington quickly agrees about major issues and politicians on both sides of the aisle line up to pass legislation Pall Mall.

Now, Congress is poised to pass the Bush Administration’s $700 billion “relief package” (aka bailout) of big Wall Street firms that have taken risky financial positions over the past few years (see AP article). You, the American taxpayer, are about to be put on the hook for more money than you can imagine. In a bizarre accounting action, it probably will even be excluded from the federal budget so that we don’t have to feel so bad about it year after year.

A few (apparently very few) are urging a slower, more deliberative approach. Others (including some that actively helped cause the crisis) are clamoring for stronger oversight than is planned by the administration. They also want caps on the salaries of executives of companies that receive a government bailout. But most Washington insiders expect the legislation to pass this week.

Democracy Lover noted in a comment on this post, “Now the "free market" Republicans (with Democratic assent) have engineered the largest nationalization in human history and created the largest socialist bank ever.” And that was before this latest power grab to assume even more control of U.S. financial markets.

Clinton confidante Lanny Davis writes in today’s Wall Street Journal:

“Now I know what former Sen. Gary Hart meant when he told an audience of wealthy Republican businessmen during his 1984 presidential campaign, "I know why you are conservatives -- you favor private enterprise for the poor and socialism for the rich."”

The knee-jerk reaction to all of this is to increase government regulation. The funny thing is that it was more regulation — brought on as the result of the Savings and Loan crisis in the 80s and 90s — that is at the heart of the current crisis.

The CEI’s John Berlau explains in this WSJ article and this subsequent post that mark-to-market rules have caused otherwise stable banks to write down the value of their mortgage assets. The rules were intended to prevent banks from hiding bad loans, but instead they have caused a wholesale devaluation of loans.

Think about it this way. A poorly cared for home in your neighborhood is foreclosed on and sold for 32% of its normal value. Instead of marginally affecting the general home values in the neighborhood, mark-to-market would essentially dictate that all homes in the neighborhood — including yours — are suddenly worth only 32% of what they were worth the day before the foreclosure sale took place.

Berlau goes on to explain that the proposed $700 billion power grab will not only fail to resolve the problem, but will actually function to make matters worse. It will cause more “fire sales,” causing loan values at even stable banks to be marked down to pennies on the dollar. Berlau suggests that this will not save the economy, but will “build a Big Government that serves Wall Street.”

The lesson is that when both parties line up to pass major legislation, you’d better hold onto your pocketbook. I have felt that divided government might generally prevent these kinds of actions, but we have divided government today and we’re still going to pass this bad deal. So just go back to your daily diversions and ignore the massive KA-CHING you hear coming from inside the Beltway and from Wall Street.