How Democracy Ruined the Bailout
ALG Editor's Note: As ALG News has argued for months, and as suggested by the following featured commentary, the bailouts of 2008 may have wholly been unnecessary:
By HOLMAN W. JENKINS, JR.
Woulda, coulda, shoulda, despite being a reputational black hole, can be educational.
Never was it a good idea to have a financial crisis in the middle of a presidential election. Involving Congress was a mistake. Letting the technical matter of keeping the banks afloat become a political football was a terrible idea. Letting our willingness to deploy giant sums of taxpayer money become the measure of credibility was a disaster. Letting all this be sold on Capitol Hill amid shrieks about the country collapsing into a Second Great Depression was a confidence killer across the economy, which until that point had held up well.
It's possible in hindsight to imagine a better course. Had matters simply been left in the hands of the Federal Reserve and fellow bank regulators, the "crisis" might have become fodder for little more than future late-night reminiscences by retired bureaucrats, pleasuring themselves with how closely the world came to burning down without the public ever knowing it.
Their efforts wouldn't have spared us a recession, perhaps a deep recession. But one mistake has been the degree to which recession-fighting has gotten mixed up with the system-bracing that should have been the preoccupation of the technocrats, with the less said to the broader public the better.
A rational, not political, approach would also have latched on early to the striking fact that much of the subprime crisis stemmed from just a handful of fast-growing counties in four states where housing prices zoomed then plummeted.
Looking back, the biggest mistake was the original Troubled Asset Relief Program -- not the idea itself, but because it required Congress's participation. Giant appropriated sums were never necessary, except perhaps by the screwy reasoning that banks had to be made to lend again for antirecession purposes.
The Fed and FDIC, formally or informally, had already guaranteed the deposits and other liabilities of the banks. Bank runs were off the table, so even if banks were technically insolvent, they could stay in business and have an opportunity to earn their way out of trouble. Withdrawal of investor support for the securitization of credit-card loans, auto loans and jumbo mortgages does present a big and somewhat related challenge (one the Fed is addressing), but otherwise the economy is not being starved for bank credit.
On the contrary, month after month, the National Federation of Independent Business, the authoritative small business trade group, has reported deepening pessimism among its members -- and yet no credit crunch. "Fewer loans are being made, but a substantial share of the decline is due to lower demand, not problems on the supply side," the group reported along with its just-released January survey.
The dynamics of our rapidly decelerating economy are not a mystery. Fear begets fearful actions. Employers cut costs and refrain from hiring. House shoppers pull back. What were good credit-card loans on bank balance sheets become bad ones. Good mortgages turn into bad ones. Nobody wants to buy a car, so auto jobs are lost.
To blame politicians is at once churlish and unavoidable. Nobody really is in control of the dynamic. Economists and philosophers talk about "path dependency" -- how a small act can shunt events onto one path or another, producing a cascade of consequences that were far from inevitable.
Ben Bernanke and Henry Paulson, in a phone call last Sept. 17, decided to involve political actors in the bailout following the Lehman debacle. They had good, legal, democratic and constitutional reasons for doing so, but it was a terrible mistake.
With perfect foresight, Mr. Paulson might have put his foot down and said, "No. We will solve this ourselves, even if it means stretching our powers beyond every precedent." After all, the Fed, Treasury, FDIC, and Fannie and Freddie (which by then were under Treasury control) jointly represented a set of tools, and balance sheets, that could credibly have stood behind just about any guarantee the two men chose to issue against further Lehman-like bankruptcies of important financial firms.
Let Congress complain about their actions after the fact. Avoided would have been the Pandora's Box of trying to politicize the delicate job of maintaining confidence in the financial system.
Harry Truman "scared hell" out of the country to get it ready to support a multigenerational facing-down of the Soviets. Scaring hell out of the economy, begun by President Bush and continued by President Obama, has produced only the runaway crisis it was advertised to prevent.