Wednesday, September 24, 2008


Come Bail Away With Me, Love

I appreciate Bickerstaff's assessment of the bailout -- straight and to the point. I readily admit to not being a finance person -- or any sort of expert on the economy. I know where I stand on it philosophically -- with my libertarian friends who are aghast at the idea of a $700 billion taxpayer-financed credit transfer.

Furthermore, Paulson and Co. were incredibly arrogant to go to Congress with a three-page paper that essentially said, "Give us $700 billion; trust us to spend it wisely" -- and then put the onus on Congress to "pass it quickly." Just from a political strategy standpoint, that's pretty dumb. It's even stupider when, according to a White House spokesman, the plan had been in the works for some time:

“It shouldn’t take much analysis to remember what happened last week, which was a very serious freeze-up in our credit markets,” Fratto said. “Our financial markets right now do not need uncertainty, they need increased certainty as to how this rescue plan is going to go forward — and that they can be sure that there is a plan to go forward — and that will begin the correction in our financial markets.”

Fratto insisted that the plan was not slapped together and had been drawn up as a contingency over previous months and weeks by administration officials. He acknowledged lawmakers were getting only days to peruse it, but he said this should be enough.

So, after being worked on as a contingency for months and weeks, a three page outline is the best the administration can do for a $700 billion bill? No wonder folks compare this to the PATRIOT Act which was a cobbling together of long-standing various intel agencies' wish-list items, but 9/11 produced the catalytic energy to get through measures that otherwise wouldn't have passed ideological muster from either the right or the left. Similarities such as this caused even Dick Cheney to get his hat handed to him by House Republicans on Tuesday.

In any event, one of the better substantive pieces I've found that outlines the need for skepticism over the bailout is by David Cay Johnston, a former New York Times tax policy writer. Johnston's questions are very straightforward, raising doubts that those on both the left and the right can find agreement:

The Administration has scared the markets and some key legislative leaders, but it has not laid out a coherent, specific and compelling need for this enormous proposal, which is the equivalent of a one-time 55 percent income tax surcharge. (Instead the money will be borrowed, so ask from whom and how this much can be raised so quickly if the credit markets are nearly seized up with fear.)

Ask this question -- are the credit markets really about to seize up?

If they are then lots of business owners should be eager to tell how their bank is calling their 90-day revolving loans, rejecting new loans and demanding more cash on deposit. I called businessmen I know yesterday and not one of them reported such problems. Indeed, Citibank offered yesterday to lend me tens of thousands of dollars on my signature at 2.99 percent, well below the nearly 5 percent inflation rate. That offer came after I said no last week to a 4.99 percent loan.

If the problem is toxic mortgages then how come they are still being offered all over the Internet? On the main page AOL generates for me there is an ad for a 1.9% loan (which means you pay that interest rate and the rest of the interest is added to your balance due.) Why oh why or why would taxpayers be bailing out banks that are continuing to sell these toxic loans?How does the proposal help Joe and Mary Sixpack who can afford their current monthly payment, but not the increased interest rate that has been or soon will take effect? Every day bankers work out loans with customers -- so why are taxpayers being asked to act when banks are largely on strike, refusing to negotiate revised deals with many loan customers?
Of course, there is the political component to take into account. Thomas Edsall notes Patrick Ruffini's call for a conservative revolt against what will be a Bush-congressional Democrats deal. Edsall likens it to Bill Kristol's torpedoing of the Clinton health-care plan in 1993. Actually, he's three years off. If anything, Ruffini's suggestion more resembles Newt Gingrich's breaking with George H.W. Bush in 1990 when "41"'s lips moved to agree to a deficit-reduction fueled by a tax hike. It' s not surprising that Gingrich is urging Republicans to reject the bailout now. Fresh from a clear victory over the Democrats on the issue of off-shore drillng -- led by Gingrich's online petition -- the congressional GOP may be more than willing to go along with the Ruffini-Gingrich strategy.

But what if? What if the ideologically (from both the far right and far left perspective) and politically correct position happens to be the wrong one? The Bush I tax hike didn't wreck the economy.

If Congress gets the bailout wrong -- i.e. doesn't authorize it -- the consequences could be trulyhat requires immediate action.
catastrophic. I was leaning toward being against it until I read two pieces by right/libertarian leaning peole whom I respect. Jim Manzi, who's written for National Review, the American Spectator and other outlets, makes a strong case for why this is an emergency t

Now consider the current situation on Monday morning. If “we” (i.e., the political leadership of the U.S.) go back on this commitment, then the loss of confidence will be even worse than it was last week. We are already trying to work around some of the inevitable inconsistencies that will be present in such an emergency action. As one example, consider that a federal guarantee for money market fund accounts means that they are suddenly much, much safer. Hence, Treasury has had to modify this guarantee over the weekend to apply only to pre-existing money market fund balances to prevent a massive flow of funds that could destabilize traditional commercial banks.

This is pure ad hoc economic management by government officials. It is a Hayekian nightmare on several levels, and as I said previously, its ideological consequences are likely to be substantial, long-lasting and negative. I can make the arguments as loudly as anyone, and I believe them, that the causes of this problem that can be laid at the feet of government are ill-advised market interventions and poor regulation, rather than insufficient controls on the market. The best long-term solutions, in my view, all involve less government intervention. It will be important to make these arguments. But the patient has been hit by a car, and is lying on the ground bleeding. It’s all well and good to discuss how irresponsible he was to wander drunk into the street, how we should better design our traffic control systems, and so on. But first we need to stabilize the patient and stop the blood loss.

Over at The Atlantic, Megan McArdle discusses how close the markets came to a catclysm last week -- which may have only been averted by Paulson stepping forward to present his bailout plan.

Finally, Steve Pearlstein in The Washington Post has had a series of columns that make the case earlier bailouts and this one in particular, can actually make money for the taxpayer over time.

I remain a skeptic -- particularly given that hardly anything has gone as "planned" in this administration (when it bothers to "plan" at all).

Alas, however, I think the current situation is too precarious to be playing political games. It's enough that George W. Bush has destroyed any real sense that Republicanism or conservatism means small government (though, ironically, in taking over the finacial industry, the Bushies may prevent Barack Obama from taking over the health care industry). Even though the roots of this crisis predate this president, the complete collapse of the U.S. economy would be a mark on his legacy that would have tragic results for all of us.

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