Some have suggested the failure of the bailout shows a lack of leadership and courage among Congressional Republicans. It’s a peculiar form of courage that embraces an unpopular desperate measure after apocalyptic prognostications by the Svengali-like duo of Treasury Secretary Paulson and Fed Chariman Bernanke. I think it’s, in fact, this is one of the GOP’s finest hours.
Lots of legislators in general and DC legislators in particular think that life is all about getting along with the other side as an end in itself. Doing something–anything–in the face of problems. This is the ideology of the execrable and boring David Broder and also, sadly, John McCain.
I start with a strong laissez faire view of economics, particularly crises. Almost always, the best thing to do is nothing. I don’t buy the mass psychosis view. It’s just a question of prices dropping. Markets always clear. Changing the rules in midstream is a bad idea. Changing the rules to inflate during an inflationary bubble is a bad idea. Picking one sector of the economy over another is a bad idea. Helping the wealthiest Americans and American institutions with taxpayer money during their self-induced crash is a bad idea. Individuals fail. Companies fail. Banks should fail too.
We need a painful contraction, particularly of the housing sector. There is no way around it. There is no reason to fight it whether with this bailout or extended unemployment benefits or anything else that will drag it out. Banks can and already have begun “workouts.” This is sensible for good credit risks sitting in overpriced homes. Let prices drop. Let businesses fail. Let hard assets auctioned in bankruptcy absorb this $700B of investor money about to be spent on the bailout rather than letting it get sucked into the rotten, overly leveraged, and opaque institutions and instruments that got us here.
Our leaders–Bush, Pelosi, McCain, Reid, Obama–have been surprised at the grass roots skepticism of this bill. There’s no trust and rightly so. It’s great to see the “leadership” get walloped. This has nothing to do with leadership. A free people doesn’t need much leadership. Ideally, we are leaderless, going in our own individual directions economically and in general. And a free people does not accept facially ridiculous transfers of their wealth to the super-wealthy because of scare tactics by one of their erstwhile comrades in the form of Treasury Secretary Paulson.
I’m sure the thought of 25 or 35% of Wall Street’s personnel unemployed is much more viscerally painful to Paulson than all the structurally employed textile workers from North Carolina or auto workers in Michigan whom the Wall Street crowd so regularly consigns to uncertainry and even penury. But why should Republicans, who acknowledge that life is often painful and that this pain is frequently unavoidable, have a different set of rules for the mega-rich.
It’s good that the official GOP leadership is being burned on this by the grass roots and less senior Republicans, just as they were burned on immigration reform and burned on Hariett Miers. We have no shortage of “leadership.” What we need is good sense and commitment to principle. Shooting down this taxpayer giveaway was a flicker of those old time limited government and fiscal responsibility principles in action.
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I totally disagree–the Republicans (and Democrats) who voted against this bill did so with no leadership vision of their own.
Leadership would have meant that rather than just voting Nay, the dissenters had an obligation to put forth an alternative plan.
Your proposal seems to take a Forest Service approach of “let it burn”, which is fine if it works, but dead wrong if it fails–and if I’m a Congressman and the Chairman of the Federal Reserve says to me that the risk of catastrophe are real, it would be difficult to rely on my own “knowledge” of economics to trump the advice from the Fed Chairman.
So even Ron Paul, I think, would need to fashion some sort of alternative plan that works less like a bailout, and more like a stabilization plan.
I totally disagree. Since when does every problem call for a government plan? When Enron goes bankrupt we had a stupid plan in the form of Sarbanes Oxley, which led in part to the mark-to-market accounting rules we suffer under. Similarly, we had a plan to solve the “housing gap” by expanding subprime.
Government should do less. It should not just respond to crises. And, while it’s true many congressmen simply reacted to constituent pressure, the best plan is to do nothing and let the businesses, banks, loans, and institutions tied up with the MBS crisis to fail. That’s my plan: mass liquidation.
Consider this. Why are these loans not being sold? It is surely in part b/c the prospect of inflated government purchase prices in a mass bailout. Take away this false hope, and things will bottom out. Markets Clear. Say’s law. Creative destruction. And all that good big picture econ stuff the speculators forgot or want us not to know.
The problem is that even after the markets clear, balance sheets are not going to look good. This is going to dry up credit, which will only worsen conditions and perpetuate the cycle. It’s going to hurt a lot of people, including people in many markets where housing was not inflated. It’s also going to hurt a lot of businesses who rely on credit for payroll on the like, such as those employing textile workers in North Carolina.
I sincerely hope you’re right that Wall Street is blowing this out of proportion to save its own hide. I wouldn’t shed a single tear if 25% of Wall Street had to go find a job in a real bank in fly over country. But let’s keep in mind that in many ways this was a government program for affordable housing funded by the financial sector. We as a nation never questioned the wisdom of extending credit for mortgages willy-nilly, so collectively we we didn’t have any more foresight than the financial interests did.
Considering this, I don’t think that it’s that crazy an idea that we should share some of the fall-out collectively, especially if it means avoiding a sharp recession that hurts us all.
I am starting to think a bailout with the same principle, with a smaller dollar amount, might do the trick. That way fear of loss would force the securities holders to bid low. It would also mean that the government would only buy the higher quality stuff, and that a lot of the most worthless paper, i.e., the tranches subordinated to other tranches on the same mortgages, would either be sold for nothing or simply taken as a loss.