The Big Scary Bailout
My gut isn't quite sure if Megan McArdle is right when she says we need a bailout, just not this bailout. Obviously, there are some major problems with the proposal currently before Congress, the biggest being the near dictatorial powers vested in the treasury department and lack of any sort of outside review. The Patriot Act parallels are all to eerily similar, where Congress is urged to act quickly and not waste time thinking during this national emergency.
The other concerns are a bit more nebulous. Of course, the cost of any bailout to taxpayers will be tremendous, but the real question is whether the economic consequences of inaction will be greater or less than the cost of a bailout. What's scary is that no one can answer that question with any degree of confidence. And for all the talk of the consequences of inaction, history has shown us that the consequences of government action can be just as bad if not worse. Most economists agree as noted in this Amity Shlaes Wall Street Journal piece, that the Great Depression was made all the worse by the New Deal. While the stock market crash of 1929 was an example of market failure, it was the government's continued mismanagement and prioritizing of inappropriate incentives that prolonged what could have been a much briefer economic downturn.
Folks of all economic stripes have decried a bailout as tantamount to corporate socialism- privatizing the gains and benefits of the market, while forcing the public to bear the negative risks. And it's true, but there's a big but in there, particularly for those on the liberal end of the political spectrum. As reported in the Hartford Courant on Sunday, all the trouble on Wall Street is being felt in the pocketbooks of Greenwich residents. Shed no tears for the billionaires, but as noted in the Courant today, the state's budget deficit is now projected to be 300 million dollars, no small part of which is due to decreased income tax revenue from the Greenwich rich.
Ultimately, the real problem is the difficulty of punishing those who made bad decisions, as it's tricky to assign blame in the first place and even trickier to come up with a plan within the confines of the law that sticks it to "greedy wall street types" without sticking it to those who really didn't do anything wrong.
After this is all over, I'm sure the government will have done something. My hope is that the reach of whatever the government does is limited and the powers delegated to deal with the issue are even more limited. But what's the correct answer here? I couldn't tell you.
The other concerns are a bit more nebulous. Of course, the cost of any bailout to taxpayers will be tremendous, but the real question is whether the economic consequences of inaction will be greater or less than the cost of a bailout. What's scary is that no one can answer that question with any degree of confidence. And for all the talk of the consequences of inaction, history has shown us that the consequences of government action can be just as bad if not worse. Most economists agree as noted in this Amity Shlaes Wall Street Journal piece, that the Great Depression was made all the worse by the New Deal. While the stock market crash of 1929 was an example of market failure, it was the government's continued mismanagement and prioritizing of inappropriate incentives that prolonged what could have been a much briefer economic downturn.
Folks of all economic stripes have decried a bailout as tantamount to corporate socialism- privatizing the gains and benefits of the market, while forcing the public to bear the negative risks. And it's true, but there's a big but in there, particularly for those on the liberal end of the political spectrum. As reported in the Hartford Courant on Sunday, all the trouble on Wall Street is being felt in the pocketbooks of Greenwich residents. Shed no tears for the billionaires, but as noted in the Courant today, the state's budget deficit is now projected to be 300 million dollars, no small part of which is due to decreased income tax revenue from the Greenwich rich.
Ultimately, the real problem is the difficulty of punishing those who made bad decisions, as it's tricky to assign blame in the first place and even trickier to come up with a plan within the confines of the law that sticks it to "greedy wall street types" without sticking it to those who really didn't do anything wrong.
After this is all over, I'm sure the government will have done something. My hope is that the reach of whatever the government does is limited and the powers delegated to deal with the issue are even more limited. But what's the correct answer here? I couldn't tell you.
posted by lonely libertarian at 12:06 PM
14 Comments:
Continued from prior discussion:
McCain co-sponsored a Fannie/Freddie reform act in 2005 saying:
" Mr. President, this week Fannie Mae’s regulator reported that the company’s quarterly reports of profit growth over the past few years were “illusions deliberately and systematically created” by the company’s senior management, which resulted in a $10.6 billion accounting scandal.
The Office of Federal Housing Enterprise Oversight’s report goes on to say that Fannie Mae employees deliberately and intentionally manipulated financial reports to hit earnings targets in order to trigger bonuses for senior executives. In the case of Franklin Raines, Fannie Mae’s former chief executive officer, OFHEO’s report shows that over half of Mr. Raines’ compensation for the 6 years through 2003 was directly tied to meeting earnings targets. The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac.
The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator’s examination of the company’s accounting problems. This report comes some weeks after Freddie Mac paid a record $3.8 million fine in a settlement with the Federal Election Commission and restated lobbying disclosure reports from 2004 to 2005. These are entities that have demonstrated over and over again that they are deeply in need of reform.
For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay.
I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.
I urge my colleagues to support swift action on this GSE reform legislation."
In case you missed it, Raines and Jim Johnson, the SR management who received performance based compensation based on manipulated numbers have since worked for Obama.
And we have McCain explicitly calling attention to Fannie/Freddie 3 years ago. We can't expect mccain to have nuanced solutions, but he is right there cosponsoring reform legislation.
Simple truths are getting erased by the fact that mccain is a terrible campaigner and obama is fantastic.
Again, I see your point that mccain sounds like a dumbass in these interviews. clearly being coached that populism is the way to go and he simply can't pull it off w/ out sounding retarded.
but come on. look at what he said 3 years ago. does he govern like the dunce you make him out to be?
You praised obama for his "nuanced" comments, where he simply stated that regulation had not been kept up to date.
McCain said this three years ago in this speech, when it could have mattered.
"These are entities that have demonstrated over and over again that they are deeply in need of reform."
"For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac–known as Government-sponsored entities or GSEs–and the sheer magnitude of these companies and the role they play in the housing market. OFHEO’s report this week does nothing to ease these concerns. In fact, the report does quite the contrary. OFHEO’s report solidifies my view that the GSEs need to be reformed without delay."
"If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole."
Plus mccain doesn't have the advantage of having jim johnson and franklin raines along side him to tell him EXACTLY what went down at fannie and freddie.
From the George WIll piece I posted yesterday:
"For McCain, politics is always operatic, pitting people who agree with him against those who are "corrupt" or "betray the public's trust," two categories that seem to be exhaustive -- there are no other people.
...
It is arguable that, because of his inexperience, Obama is not ready for the presidency. It is arguable that McCain, because of his boiling moralism and bottomless reservoir of certitudes, is not suited to the presidency. Unreadiness can be corrected, although perhaps at great cost, by experience. Can a dismaying temperament be fixed?"
It's not about identifying crises but what McCain's response to crises will be. Will mentions campaign finance reform in his piece as a classic example of McCain at work- good honorable public servants versus those corrupted by K Street money. Campaign finance reform was the solution, a brutal piece of free speech crushing legislation that McCain found necessary for the national good.
Listening to McCain on the economy, today sounds like much of the same- politics reduced to good guys and bad guys and there's a need for more freedom crushing legislation to be passed.
"It's not about identifying crises but what McCain's response to crises will be."
McCain didn't identify a crisis. He identified a problem with crisis potential 3 years before it turned into a crisis, but he was crushed by Schumer, frank and the dems. If McCain were president maybe he could've done something.
McCain's attempts in 2005 to limit the size and influence of these GSE's was not only correct, but exactly in line with your ideology.
Yet you choose to obsess over his rhetoric 2 months prior to an election, not even bothering to respond to an extremely relevant and significant piece of information here.
It wouldn't bother me if you were some whacko who is generally unconcerned with facts, but you're not. I just don't get it.
What I'm talking about is what kind of leader John McCain will be, which is the only thing I've been concerning myself with here.
Plenty of politicians, including members of the Bush administration were concerned about Freddie Mac and Fannie May for years, but nothing got done, because, well, that's politics. I'm somewhat familiar with McCain's record in the Senate and I don't trust the guy because his self-proclaimed biggest accomplishment is campaign finance reform. The guy may wind up taking some good positions and "come out on the right side," but his record to me doesn't seem to indicate a strong adherence to any particular ideology.
True, I don't care for McCain's rhetoric, but that's about the sort of things I wish he'd say as a Republican, not about my opinion as what sort of President he'd be. My concern with the potential President McCain is as George will puts it, McCain's "operatic view of politics," which turns issue after issue into those who agree with John McCain versus those who betray the public's trust.
I read George Will's entire piece and I don't find it compelling in the least. It is centered on McCain's hypothetical firing of Chris Cox. Will thinks that's an example of McCain's "operatic view of politics"? No. Clearly it's a political ploy by McCain to further distance himself from Bush and to bolster his maverick image. McCain is also trying to demonstrate that he gets the severity of the situation, as he's still trying to recover from his dumb "the fundamentals are strong" comment. He can't win if he's linked to "Bush economics" and saying he'd fire Cox is another way to push the point that he's different. I agree it was dumb. I disagree that it's as significant as you make it out to be.
"operatic view of politics", no. political posturing yes.
But if you find that piece more compelling than McCain's testimony in 2005, that's your right.
"McCain didn't identify a crisis. He identified a problem with crisis potential 3 years before it turned into a crisis, but he was crushed by Schumer, frank and the dems."
I'm very curious to know how Schumer, Frank and the D's "crushed" McCain in 2005. They couldn't have done it w/o the tacit support of the Repubulican administration and the Republican majorities in the house and senate.
RHofUlster
While the republican majority meant a lot in the house, it meant little in the senate. I believe they had 56 republican senators and they needed 51 votes (my #s could be off). The reform bill in 2005, sponsored by mccain and 3 other republicans, was rejected by all democrats and by enough republicans (only 6 had to say no), that it never even came to a vote.
And a similar situation occurred in 2003 when the Bush administration attempted to reform the entities, but that attempt failed even sooner.
So it sounds good to blame everything on the republican majority, but the fact of the matter is the majority of republicans supported reform led by McCain, all democrats did not, enough republicans dissented and there you have it. No reform.
And there are numerous quotes out there by Schumer and Frank even more specifically from the discussions in 2005 where they explicitly defend fannie/freddie claiming they were functionally sound, helped provide housing to lower income americans and in no way presented a risk to the American tax payer.
what is "rhofulster"?
And BTW, do you think it's a coincidence that Frank, Dodd and Schumer, Fannie's eternal defenders, also happen to be the recipient of the largest donations from these GSE's?
Somethings wrong when a GOVERNMENT sponsored entity can flood a GOVERNMENT party with money and influence decisions in this way.
That's different than a perfectly private company's donations. That's called lobbying.
This is called corruption. And it's on Frank's hands.
Oh and then, when shit goes down and the GSE's management is laid off, they cozy up and work for Barack Obama, the next likely president of the US.
This is new politics?
"Folks of all economic stripes have decried a bailout as tantamount to corporate socialism- privatizing the gains and benefits of the market, while forcing the public to bear the negative risks." from LL
The reason many wanted these entities reformed a long time ago is because everyone knew the government implicitly backed Fannie and Freddie, who were privatizing the gains. The public always had the risk because everyone who did business with Fannie/Freddie knew the government would back the entities if failure ever arose.
These entities are the ones who SHOULD have been highly regulated since we the tax payer were in implicityly bankrolling them if they had a bad beat. Instead we allowed them to operate with lower capital ratios than any other US financial institution.
We've always been taking the risk, while the company's (and senators who defended them) reaped the gains. This truly is corruption.
Maybe I'm blinded by bias (and I'm sure I come off the way to anyone on the other side), but the associated press' releases yesterday and today, which are supposedly objective reports, are basically pro-democrat editorials/op-ed pieces. It's been getting worse for some time now, but it's getting flat out absurd.
I'm sorry LL, I don't mean to take over your blog, but I'm freaking out.
Apparently a sticking point on the bailout plan was that the Dems were demanding 20% of (hypothetical) profits from the distressed asset purchase to go to...
ACORN!!!! A wildly corrupt left-wing organization that Obama has lawyered for in the past.
Are you kidding me!? We're putting together a $700 billion tax-payer funded bailout to save our financial system from what some believe is an inevitable collapse. And the democrats are insisting on an earmark that provides potential profits to ACORN!?
Aside from the absurdity of attaching this kind of thing to a time-sensitive crisis bailout plan, does anybody see the irony that we want to funnel even more money to an organization that is focused on getting people who can't afford houses, into houses?
LL, I criticized you in the past for trying to say that this wasn't a market failure. I said most of the blame fell at the feet of the private companies. I was wrong. Democrats and some supposed republicans created this. Decades of well intentioned, moronic policy aimed at getting all americans into houses (as if renting is 3rd worldish) caused this.
Oh, the banks eventually made bad decisions. But when your competitors are out there lending to everyone and anyone because congress is facilitating it, you have to follow suit or else you can't compete.
Congress: "Lend, lend lend lend lend to anyone and everyone. It doesn't matter if they can pay the mortgage, Fannie will buy it from you regardless (with 4X as much leverage as commercial banks)"
Banks: Umm well I'd rather not, but my competitors are, so I have to or I'm gonna go out of business.
housing prices bubble
a few leaders voice concern
housing busts
Congress: Greedy wall street execs caused caused this.
Yeah Im sorry LL, you were right. We should all be petrified of what this congress is going to do. And we don't even have an objective media to report things as they are. Scary.
Sorry for using your blog as a release.
Exactly. Or as someone else I read last week (don't remember who) put it- we've had greed around for thousands of years. It's not like people in finance weren't being greedy and then just got greedy in the last 10 years. Businesses always make risky investments, they always make mistakes, and they always fail- what happened here, to this large extent doesn't happen without the government helping out every step of the way to blunt traditional market incentives.
It's sort of stupid to blame businesses for failing, because that's sort of the point of business. Although perhaps it's stupid to blame government for failing too, as that seems to be the point of government.
Post a Comment
<< Home