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Join Date: Jul 2000
Location: Houston, Tejas
The Bailout So Far...
Another good one from the WSJ today!
Here's a fact to mull over: Washington a few months ago might have bought the entire stock of subprime mortgages for about half the money committed by the Fed and Treasury last week to prop up Citigroup and spur consumer and mortgage lending.
True, had it done so, it might have irritated taxpayers and moral-hazard philosophers, since it would have meant relieving bank shareholders of their mistakes. But buying up bad mortgages would at least have left the private sector in charge of issuing new credit, which -- however bad its performance during the housing bubble -- would likely produce better results than government directing credit allocation in the economy.
Sadly, that's where we are today. Bless them for trying, but our firemen have done an objectively crummy job. They failed to douse the confidence/systemic-risk fire and now have moved on to fighting recession by turning credit allocation into a public utility. Vikram Pandit of Citigroup says: "We have gone from arm's length, free market, just-in-time availability" of funding to a system where big credit-reliant businesses now have only one place to turn, government.
With pundits threatening the economy with deflation and another Great Depression, none have really been able to argue effectively against this expansion of government responsibility and interventionist zeal. It all happened out of the hip pocket of the Federal Reserve and Treasury, with a token congressional involvement in enacting a $700 billion package on terms that proved flexible to a degree that would make Gumby blush.
The original "Tarp," greeted with hosannas when it was announced, soon came to be treated as idiocy. Why? Because of quibbles about whether Washington would pay face value or discount value for the bad mortgages it would have taken off banks' books.
That distinction once seemed huge -- Heavens, it would be a crime to "overpay" for these assets! -- and now seems impossibly puny.
At least the original Tarp would have restricted government's role to saving the private sector from a one-time, however humongous, mistake in extending credit to homebuyers based entirely on expectation of rising home prices. Saving the banking system from this error, and inevitably forgiving many CEOs, shareholders, loan officers who benefited from it, would have been costly and produced moral hazard, yes -- but less so than what we're doing now.
Oh well. Maybe Washington will succeed in forestalling a deep and prolonged recession. Maybe all the money ($8 trillion by one count) being printed to acquire or insure mortgages, student loans, credit card receivables, commercial paper and banking shares will be seamlessly withdrawn once those assets are sold back to willing parties in the private sector when the panic has passed. Maybe taxpayers will even make a profit on the deal.
As Doug Flutie can testify, sometimes a 65-yard pass into the end zone lands in the hands of your own receiver.
Then again, a deep recession may always have been unavoidable by government action. Tarp (the Troubled Asset Relief Program) may turn out to be Tamp (the Troubled Asset Multiplication Program) as public money is shoveled at mortgages that will go bad, failing companies that will continue to fail (see Detroit), etc.
The U.S. was not Japan when we started but may be Japan when we're done. Remember, the Japanese had a much more closed financial system when entering their post-bubble "lost decade" of the 1990s. We have venture capital, private equity, hedge funds, and an entrepreneurial tradition -- one that is far from absent in banking. A reason the U.S. has been perennially "overbanked" (in the eyes of some analysts) is because investors keep starting new ones.
All that may come to an end as cheap government credit drives financial entrepreneurs to the sidelines. We may be able to roll over the resulting mounting federal debt at cheap rates for a while if international markets are willing (there is still confidence in government at least). But unless Gerard Phelan catches the ball in the end zone and GDP bounces back strongly, the bailout's end result may be towering tax rates, drastic spending cuts or serious inflation -- or all three.
Such is the Hail Mary being executed in your name by the federal government. Hold onto your hats and pray while the ball is in the air.
The pessimist complains about the wind; the optimist expects it to change; the engineer adjusts the sails.- William Arthur Ward (1921-1994)
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