The point of the bailout is not to encourage imprudent risk. That was what the Federal government was doing with Fannier Mae and Freddie Mac. To quote Barney Frank, "I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing." [External Link]
Nor is the point of the bailout to prop up a market bubble. It's to prevent a financial market collapse that will result in a significant and prolonged drop in GDP.
It's unfortunate that Congress has morphed a 3 page bill into a 450-500 page tome, but the sooner they act the more likely it is that the collapse of banks, insurance companies, and other financial institutions can be arrested.
"The point of the bailout is not to encourage imprudent risk."
That may be, but the unavoidable and completely predictable effect of the bailout will be precisely that.
"It's to prevent a financial market collapse..."
But it won't prevent a collapse, because the fundamental practices of these big institutions are unsound. At best the bailout will merely delay the collapse a bit. And as the government meddling in 1929 demonstrated, this bailout will also worsen and prolong the eventual collapse and impede the subsequent recovery.
Congress has seen fit to play partisan politics and hyper-inflate the bill with pork. In other words, it's business as usual. In other other words, they do not believe it is a crisis. As Instapundit commented, "I'll believe it's a crisis when the people who tell me it's a crisis start acting like it's a crisis."
"That may be, but the unavoidable and completely predictable effect of the bailout will be precisely that."
If the market collapse was caused by the government, by encouraging unsound practices at quangos Fannie Mae and Freddie Mac, why are other companies being punished for "imprudent risk" they had nothing to do with.
I'll go further. The Great Despression was largely caused by the Federal Reserve's tight money policies in 1929-32 that caused a collapse in the money supply. (Read Milton Friedman's Free to Choose, Chapter 3) Were all the banks, insurance companies, factories, etc., that went under as a result guilty of imprudent risk? How about the workers who lost their jobs?
If you think this bailout reeks of socialism, just wait until President Obama (or McCain) rescues us from a new Depression.
It took the government to create this mess, and, unfortunately, it's going to take the government to keep it from getting far worse.
What is interesting it is the Democrats who ignored the warning signs about Freddie and Fannie back earlier this decade,and prevented some Republicans from taking action , and now they are blaming the Republicans for the mess !
Posted at 2008-10-02 14:19:25 [PermaLink]A beautiful, self-sustaining circle! The government, through its attempts to force the marketplace to produce a desired result, precipitates a disaster. Innocent people who have done no wrong suffer; smaller banks and companies who have acted with fiscal prudence are ruined. But the only way to avert a total catastrophe is to -- wait for it -- ask the government to meddle even more! This time they'll get it right, I'm sure of it.
Bruce, you may be right. I'm no financial expert, just a reasonably educated working stiff. But to me the current "resolution" to this "crisis" stinks to high heaven. I suspect that the best thing to do would for the government to STOP messing around, reduce the more egregious legislation, and allow the market to right itself.
It is true that this will result in some innocent businesses and people suffering, and that is totally unfair. But I am convinced that extracting the better part of a trillion dollars from taxpayers' pockets to "fix" the problem will lead to even greater suffering. It will just be more diffuse and difficult to tie to the real cause -- which no doubt suits the politicians just fine.
The Community Reinvestment Act(1977) as amended in 1995 required banks to make large numbers of subprime loans or face penalties. The banks were able to sell these high risk mortgages to Fannie and Freddie, who bundled them with others, added a guarantee of repayment, and resold them. Fannie and Freddy were set up by the government, but were not required to meet the same standards as banks or other corporations.
A similar situation caused the Great Depression. In 1919 the US government made the banks grant loans to businesses at below market rates. The losses on these loans weakened the banks, and by 1929 a chain reaction started when several small banks failure spread through out the banking system.
The current crisis was caused by the Democrats buying low income votes by promising that everyone could buy a home, even if you couldn't afford it.