The fight is hardly over, but today bore witness to a remarkable convergence. The American public maintained the common-sense position that forcibly transferring other people’s money to bureaucrats and irresponsible financial institutions is a stupid idea. And the House of Representatives actually voted that way, defeating the Bush-Paulson-Bernanke bailout, at least in the first round.
The pointed drop in the stock market proved a sobering reply. Yet that doesn’t change the fundamental issues. Those investors counting on taking money from others by force deserve to lose their shirts, frankly. What needs to happen is for people to learn that, even if misguided federal policies are pushing the market in a dangerous direction, it’s foolish to march whistling down that path with the expectation that the feds will bail them out with tax funds (or deficit spending). We need a market correction — a correction to the years-long, politician-induced lending spree that caused the real-estate bubble and piled up mountains of bad debt.
How did the Colorado delegation vote? “Among Colorado’s representatives, the proposed bailout was supported by Tom Tancredo, Diana DeGette and Ed Perlmutter. The issue was opposed by John Salazar, Mark Udall, Marilyn Musgrave and Doug Lamborn.” Thank you, Salazar, Udall, Musgrave, and Lamborn. Shame on you, Tancredo, DeGette, and Perlmutter.
Today I link to three great critiques of the bailout.
First, Craig Biddle of The Objective Standard writes to members of Congress:
I and other Americans will forever condemn any and all politicians who vote for or in any way support a bail out of Wall Street.
Every thinking American knows that the cause of this catastrophe was government intervention in the economy via the Federal Reserve, Fannie Mae, Freddie Mac, the Community Reinvestment Act, etc. The notion that more government intervention will solve the problem is absurd, and to act on that notion would be an obscene dereliction of responsibility and a travesty of justice.
The only sound solution to this problem is for the government to acknowledge that its intervention is the fundamental cause of the situation, and, correspondingly, to remove its hands from the economy and let the market correct itself via bankruptcy procedures, liquidations, takeovers, etc. This would lead to a highly volatile market for a brief time, but the market would quickly reallocate assets to those who are most competent, and the economy would begin to recover.
This is not rocket science; it is economics 101, and Americans know it. Don’t test us.
Second, The Crucible & Column brings us “‘How Your Government Can Wreck Your Economy and Get Away with It’ in 6 Easy Steps.” Following are the first two:
1. Set up a Mechanism to Launder Risky Home Mortgage Debt. Create an agency whose sole purpose is to “offer liquidity to the secondary mortgage market.” The agency will guarantee home loans for a small “insurance” fee, or it will buy them and repackage them as “mortgage-backed securities” also guaranteed to pay, regardless of default. Set low standards for the types of loans that will quality, and make sure your fees are low so lots of people will sign up for your insurance. Sell these new low risk securities into the financial markets. Viola! You make risky debt look good, and sell it to “suckers” thereby providing liquidity to the mortgage market. Oh, it’s true that some of them won’t fall for it, but all we need a few, the dumber ones, and the ones who know what’s going on, but who are hoping to find a sucker of their own to pass the buck to. Oh, almost forgot. Make sure you set up this agency as a “private” company. Imply that you’ll save it if it gets into trouble, but don’t promise it explicitly. Give it a nifty, folksy name like Freddie Mac or Fannie Mae.They’ll love that.
2. Force banks to offer Risky Debt. What? Not enough people are helping you issue risky debt? Well, that’s easy. Just pass a law that forces banks to lend to high-risk prospects. Tell them you won’t let them do things like merge with other banks unless they can prove they are issuing risky debt the way you want them too. Make sure the law states that they specifically shouldn’t look at things like applicants’ income, or current assets when making decisions about them. If it doesn’t work so well at first we can just revise it, so our money laundering agency gets into the act too. Oh, name again. We certainly don’t want something like the “Let’s Issue More Risky Debt Act”, so we need something that will tug at their heartstrings. Got it! the “Community Reinvestment Act”! They’ll love that.
Third, Jeffrey Miron has written a powerful piece for CNN (thanks to Damon Payne):
… This bailout was a terrible idea. Here’s why.
The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.
Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.
This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.
Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.
The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government. …
Please read the rest of Miron’s excellent article — and mention it to your friends.
Today was a good day for liberty. The war is hardly over, but in our era good days for liberty are increasingly rare and cause enough to celebrate.