More like 700 billion...
Like the Bear Stearns news, like the Fannie Freddie news, and like many other emergency actions in this season of extraordinary things, the agreement on the bailout plan will probably be announced today (Sunday) just before the opening on the Asian markets.
Without exaggeration, the entire political and economic world waits anxiously for news from our Congressional leaders. Few times in human history have so many people been connected to each other in so many ways. As we have all climbed higher by the interlocking steps of global commerce, so could we plunge and fall by the stumble of one.
Does something need to be done? Absolutely. Does it need to be done quickly? Absolutely. Is this bailout plan the best option? Maybe.
The stakes of never been higher. Paulson’s original request was said to be only a few pages long. The bullet points of the rumored deal today may only be a few pages more. Our concern? The DNA of America’s economic future will be written by bickering politicians (most of them trained as lawyers). The powers within the plan tinker with the deepest parts of our economic engine. The risk for devastating unintended consequences is too great to be ignored. A plan that pleases everyone will help no one. A plan that is diluted to the lowest agreeable denominator will allow holes into which demons will sneak.
Our main concerns? Hard as the politicians try to convince us otherwise, this plan will not turn a profit for the American taxpayer. The loans they will be forced to buy are too damaged, they are secured by property that has depreciated too far, and no healing of the markets will make them attractive enough in the future to be sold at a reasonable profit.
Even though the balance sheet of the Federal Government is the largest on the planet, this episode will leave the deepest of scars on her face. Of course the Congressional Budget Office let us know this weekend that they plan to zero out the whole episode like a simple credit and debit. We will borrow 700 billion and the value of what we have bought will be 700 billion – voila! – we are fine! But this ignores the fact that the Treasury will spend an obscene amount of money trying to administer this massive plan. It also ignores the fact that the valuation of the loans is not based on a real market value, it will be set by the Government itself when the purchase is made! Imagine this conversation with your CPA. “I borrowed 1 million dollars to buy this chunk of lead even though no one else on the planet would even pay a nickel for it. However, could you please value it at 1 million on my financial statement so I will not look so bad? Thanks – you are the best!”
Proud as we are of our American system, our government does not have the best track record of being a well oiled and efficient machine. To believe that they will be able to buy hundreds of thousands of bad loans, call those who are struggling and renegotiate their mortgage to a manageable level – it, well, it would be funny if it were not so painful. To put the size of this crisis into perspective, when Indy Mac failed, the FDIC owned 740,000 loans overnight. No less than 60,000 of those loans were in trouble and required a phone call. Indy Mac was a spoonful; this bailout is an ocean.
And last, this plan has placed our collective feet on the slipperiest of slopes. What will keep your neighbor from halting his payments so his loan will be bought up too? Shouldn’t everyone get a chance at a little renegotiation now and then? After all, his house depreciated just like yours.
Warren Buffet says that if we do not do something, the financial system will totally meltdown. Falling into chaos does not sound so good. But the ’something’ we should do stares at us like a giant question mark.
Our solutions come from lessons of the past. First, tempting though it may be, do not over regulate. Second, make sure the plan is temporary and has its own end written into the beginning. Third, stop the maniacal dedication to affordable housing mandates. And fourth, build a framework to better insulate politics from monetary policy, and pandering from fiscal policy.
Do not be tempted to over regulate.
Deregulation has been vilified; defending it is near heresy these days. We do need to modify our oversight. We do need to regulate better, but if we react to this grave crisis by introducing punitive regulation under the powerful thumb of Federal control, we will strike an irreparable blow to the core of our American soul. It is not a new argument to be sure. Jefferson and Hamilton could not agree, nor could Jackson and Clay. But the balance struck by their conflict build into our DNA the roadmap for prosperity. The middle road has given us decades and decades of unfailing economic power, unrivaled military power, and unparalleled ingenuity. It will be our national disgrace and our greatest shame if wade our American republic into the black waters of socialism.
Make sure the intervention is temporary.
The plan must have a self destruct timer. Historically, it is easy for a government to begin to provide a service or function. It is nearly impossible to take it away. Remember what happened to the Roman Emperors who gave out food to curry favor with the public in times of need. Taking the food giveaways back later proved a bit more difficult. The blank check to Freddie and Fannie should have been accompanied by this clear mandate. You will shrink quickly, your credit card will be cut up, and you will go to the private sector and work for your bread and butter. You may not slop at the public trough again. Ever. The same should be said to Wall Street wizards. Any failure of the monsters you create will be your failure too. You can keep all your winnings if you win, but you will suffer the same punishment and loss as the rest of us if you do not. Risk will no longer be decoupled from reward.
Affordable housing in small doses please.
Communities need socioeconomic diversity to be healthy. Home ownership lifts up communities in remarkable and mysterious ways. Our American dream is as much a human one as a cultural one. But politicians started handing out the American dream like a dime store trinket. They threw about down payment assistance programs and subsidies and tax breaks like gold coins in a mob. In their arrogance and in their ignorance, they cared more for their own reelection than for the potentially devastating consequences of their actions. If they were too stupid to know the peril of their choices, they deserve no more forgiveness or reprieve than those who ruthlessly ignored the signs. The stench of ill gotten political gain lingers all about our last three presidents and lays thick in the halls of our federal and state buildings. There are honorable people in politics – but tragically few indeed. We are all to blame for placing them there – for such is our right, and such is our folly.
Politics is a strange bedfellow of monetary and fiscal policy.
The founding fathers culled wisdom from thinkers all over the world to formulate our constitution. Hundreds of years of thought and political philosophy were hammered into our American bones and boiled into our American blood. Separating the functions of governance and giving each a glimpse and a hand into the other was the great genius of the age and the most precious of gifts to posterity. The remarkable connectivity of the modern world, more specifically the astounding economic interdependence of our modern world, demands that we author a new chapter. Monetary policy and fiscal policy are too near our political whim. No President should ever call a Fed chief and ask them to lower rates to please the American public. No tax break should ever be simply in return for support, or a contribution. No tax increase should ever be simply a matter of social engineering. Admittedly, financial levers move social wheels and vice versa; they always will be connected at the deepest level. But we must endeavor to design a new system of separation, with checks and balances, that will guide our decisions in a more diligent and careful manner.
