More Must-Reads on the Bailout Bomb
Tuesday, September 30th, 2008 3:55 pm by NealJoseph Calhoun, “In Times of Crisis, Trust Capitalism” (HT: powerline)
Last week Goldman Sachs raised $10 billion in new capital in one day. They sold $5 billion in preferred stock and warrants to Berkshire Hathaway and also completed a secondary offering of common stock that raised another $5 billion. Friday, JP Morgan raised $10 billion in a secondary offering to help pay for the Washington Mutual takeunder. Both of these offerings were oversubscribed, meaning that the companies could have raised more capital if they wanted. There is not a shortage of capital for well run financial companies. There is, however, a shortage of capital for companies that have acted irresponsibly with investor capital in the recent past. For some reason, our political leaders believe this is a failure of the market, but isn’t this what should be expected from rational investors? …
The biggest bank failure in the history of the United States happened last Thursday night and by Friday morning, it was business as usual. The only difference was the name on the door and the losses suffered by those unfortunate enough to invest in Washington Mutual bonds or stock. The taxpayers didn’t lose anything and depositors didn’t lose anything, only investors. That is how capitalism works in case everyone has forgotten.
The “crisis†we face today is not a creation of the market. Government intervention over many years (but especially the last year) is what brought us to the point where we’ve placed our hopes for economic recovery on the good intentions of a Congress facing re-election in a few weeks. There has been much commentary recently about the role of Fannie Mae and Freddie Mac in the creation and expansion of the sub-prime mortgage market which many believe to be the cause of this mess. That criticism is certainly warranted, but little attention has been paid to the real culprit – the Federal Reserve. Furthermore, what attention there has been is concentrated on the role of Alan Greenspan rather than Ben Bernanke. While Alan Greenspan deserves his share of the blame, Bernanke’s contribution to this mess should not be minimized or excused. …
Now we face a situation where banks are not willing to lend to each other and have therefore become dependent on the Fed for daily liquidity. This is a direct result of the Fed’s actions. Banks will not lend to each other because they don’t know which ones are really in trouble. The rise in inter-bank lending rates is a rational market response to a lack of information. Furthermore, why pay those inter-bank rates when the Fed or ECB is offering easier terms? …
Now markets are waiting on pins and needles as the politicians haggle over the details of the latest bailout attempt by the Fed and Treasury. This has introduced another roadblock to the re-capitalization and reorganization of the financial industry. Companies that are in need of capital are waiting to see if the plan will bail them out of their difficulties. If Hank Paulson is willing to pay an above market price for their bad loans, why should they dilute their equity now? Why not wait until they can offload the bad paper on the taxpayer and raise capital at a better price? Why take Tony Soprano terms when Uncle Sam is willing to let the taxpayer take the hit for you?
You should read the rest of this article. It offers some unique perspectives into the role the Federal Reserve in this mess, including this gem:
“The government apparently believes that the key to economic recovery is to allocate limited resources in an inefficient manner. Does that make sense?”
Nothing could more painfully demonstrate what is wrong with Congress than the current financial crisis.
Among the Congressional “leaders” invited to the White House to devise a bailout “solution” are the very people who have for years created the risks that have now come home to roost.
Five years ago, Barney Frank vouched for the “soundness” of Fannie Mae and Freddie Mac, and said “I do not see” any “possibility of serious financial losses to the treasury.”
Moreover, he said that the federal government has “probably done too little rather than too much to push them to meet the goals of affordable housing.”
Earlier this year, Senator Christopher Dodd praised Fannie Mae and Freddie Mac for “riding to the rescue” when other financial institutions were cutting back on mortgage loans. He too said that they “need to do more” to help subprime borrowers get better loans.
In other words, Congressman Frank and Senator Dodd wanted the government to push financial institutions to lend to people they would not lend to otherwise, because of the risk of default.
The idea that politicians can assess risks better than people who have spent their whole careers assessing risks should have been so obviously absurd that no one would take it seriously.
But the magic words “affordable housing” and the ugly word “redlining” led to politicians directing where loans and investments should go, with such things as the Community Reinvestment Act and various other coercions and threats.
This was a terrible bill. To take just a few particulars, why is there no reform of the government interventions that got us to this point in the first place? Why aren’t Fannie and Freddie being wound down — even after we’ve now had to make explicit the implicit, disastrous government guarantee? Why is Pelosi saying (as I noted in an earlier post) that the authority in the bill will allow the Treasury Department (perhaps soon an Obama Treasury Department) to take bad debt off the hands of mismanaged state and local governments?
Why don’t we have a firmer formula for how Paulson (or, again, an Obama Treasury Secretary) will determine the value of the toxic debt before the government starts throwing money at it. Now, I’ve heard all the arguments about how, for the bailout to “work,” a premium above current value would have to be paid. Even if I accept that as true for argument’s sake, however, are you telling me I am wrong to worry that this bill gives the Treasury Secretary unduly wide latitude to feed taxpayer money into businesses that should fail because they’ve been irresponsibly leveraged and utterly mismanaged?
Why does the government have to buy the securities? If liquidity is the problem, why can’t it make money available for loan, taking back collateral, placing the risk on the bad actors rather than the taxpayers, and letting market set a reasonable price for the bad debt by auction and other conventional methods. Most people will pay their mortgages so these “troubled assets” still have significant value. And there are buyers out there. The troubled entities are not selling at the price the market will bear because they (understandably) think they will get a wildly inflated price from the government — once again, perverting the market: penalizing responsible actors, rewarding the bad actors who brought us to this point, and keeping those bad actors in business.
Also, count me among those few here who want to thank the House Republicans for taking a bold stand against what had been a stampede on a scale I have never before witnessed on matters of huge consequence. Conservatism is more than a quaint belief-system to be embraced and debated over donuts at Starbucks. It is more than a list of talking points. It is the foundation of the civil society. The liberal uses crises, real or manufactured, to expand the power of government at the expense of the individual and private property. He has spent, in earnest, 70 years evading the Constitution’s limits on governmental power. If conservatives don’t stand up to this, who will? If they don’t offer serious alternatives that address the current circumstances AND defend the founding principles, who will? The House Republicans have done both. And I, for one, thank them.
Incidentally, if you want to buy a home or car today you can. And if your credit is decent, you can get loans at a good rate. Last week we were told that if a deal was not struck by last Friday, our economy would collapse. It has not. That is not to say the evidence of economic troubles or worse should be ignored. It is to say that now is a time for reasoned decisions based on tried and true principles, not for abandoning them. I notice that the socialist, who, for the last 30 years, has insisted that private institutions make risky loans based on non-economic factors, still has not abandoned his policies. Socialism does not work. We shouldn’t support more of it.