I admit to not having the expertise to address the issue of the proposed US Treasury bailout in any serious way, so instead I turn to someone whose economic advice I greatly trust, one Donald Luskin, who blogs at the Conspiracy to Keep you Poor and Stupid. This piece appeared at National Review Online. By the way, Luskin's blog made my list of the 24 Best Conservative Blogs.
To arrive at a principled view on this intervention, we must answer
three critical questions: Is it necessary? Will it work? And even then,
is it morally justifiable?
Unfortunately, we are thwarted at the outset. There’s simply no
objective way to know whether the banking system is as close to
disaster as top officials at the Treasury and Federal Reserve claim.
They themselves don’t really know. This is a “banking crisis,” they
say. But then again, other politicians claim there is a “health care
crisis,” an “immigration crisis,” an “energy crisis,” and so on....
According to the Federal Deposit Insurance Corporation there have been
15 bank failures in the U.S. between 2007 and today. We had thousands
over a few years in the late 1980s and early 1990s. Since the stock
market hit an all-time high last October, the S&P 500 has fallen 23
percent. It fell more than twice that — 49 percent — during the last
bear market, between March 2000 to October 2002.
Even if you grant that this really is a “crisis,” and that it justifies
an extraordinary intervention, there can be no doubt that the $700
billion authority being sought for the purchase of distressed
mortgage-related securities is far too great an amount. Of the $1.26
trillion in non-prime mortgages — that is, “sub-prime” and “Alt-A”
mortgages — $743 billion is already either owned or guaranteed by
Fannie Mae and Freddie Mac, companies that were shored up by a
government rescue earlier this month. That leaves $521 billion, which
means the Treasury’s $700 billion would be more than enough to buy them
all. And that’s even if the Treasury paid full value. In fact, the
Treasury will get a steep discount, considering that many of the
mortgages in question are in delinquency or default. Does the Treasury
really have to buy every single non-prime mortgage — even the healthy
ones — twice over?
And if the Treasury’s authority were scaled down to something more in
proportion to the size of the asset market it claims to address — say
$350 billion — must that authority be granted all those dollars at
once? Couldn’t we start with $100 billion and see how it goes, and go
back later for more if necessary?
In order to restore confidence in these shaky markets, there’s no doubt
the administration would claim that its commitment must be both large
and irrevocable. But considering the enormous powers being vested in
the discretion of a single unelected official — the Treasury secretary
— markets may also find solace in the idea that there will be an
accountable process for learning from mistakes and making appropriate
corrections.
Which brings us to the next question: Will it work?
Nobody knows. On the face of it, it is plausible that the banking
system could be reinvigorated by having unwanted assets taken off its
books. With those assets gone, and replaced by government cash, banks
could stop worrying about the bad decisions of the past and get back to
the business of financing investment and consumption in the American
economy.
Yet there is ample room for doubt. The officials advocating this —
Henry Paulson and Ben Bernanke — are the same ones who, in similar
haste, engineered interventions this year in the collapses of Bear
Stearns, Fannie Mae, Freddie Mac, and American International Group.
With each intervention the banking crisis has gotten progressively more
severe. Experts differ on this, but it is my professional judgment that
these interventions actually made matters worse, because of the
unintended consequences that were nearly impossible to forecast at the
moment of decision. We simply cannot know what unintended consequences
might be unleashed in the process of a massive acquisition of mortgage
assets by the federal government....
It seems at first blush that spending $700 billion to buy
mortgage-related securities would be a budget buster. But remember,
this is not government “spending.” It is government “investment.” The
Treasury would issue bonds, pay a low interest rate on those bonds, and
use the proceeds to buy mortgage-related bonds that pay a high interest
rate and can probably be sold at a profit in the future.
It also seems at first blush that the government ought to not bail out
banks that made terrible investments they now regret. But remember,
many of these bad investments were the result of government meddling.
Would we be experiencing a sharp housing downturn, and a wave of
mortgage defaults, if the Federal Reserve had not created a housing
bubble and a mortgage bubble in the first place by artificially
lowering interest rates to 1 percent in 2003 and 2004? And how much was
the housing bubble inflated by the highly leveraged mortgage buying
spree of government-sponsored and government-influenced Fannie Mae and
Freddie Mac? Shouldn’t the government shoulder some responsibility for
its own mistakes?... In the end, each principled conservative will
have to use his or her own judgment to weigh the imponderables here and
come to a conclusion, yeah or nay. As of this writing, I’m inclined to
support the administration’s proposal, although I wish it could be made
smaller, at least at the outset.
Hope that helps. Click the link above to read the rest.
UPDATE: More from Luskin on the effects of the bailout, as he predicts that it will be inflationary. You can see all of Luskin's regular appearances on Kudlow & Company at Luskin's blog.


Recent Comments