On Bailouts, Bailing, and Bailing Out
In the news, Bush, pols push today’s House bailout vote, and Euro-flurry of bailouts. Deep stock drop on uncertainty: Wall Street wants more $$$. Quick roundup on the affirmative-action financing debate and other deep thot follows:
Meanwhile, bailing mightily at the Baltimore Sun, Cynthia Tucker posits: Minorities scapegoated for financial woes. No evidence for claptrap that federal regulators injected skin color. But minorities aren’t being scapegoated. They, and a lot of other people, are the victims of white congressmen pushing to ease credit rules as a form of affirmative action in housing finance, just as minorities have been the victims of other well-intentioned affirmative action policies and welfare practices. But she didn’t mention that part.
Boston Herald, Critics: Why didn’t Frank act sooner?
As chairman of the House Financial Services panel, Rep. Barney Frank has been working frantically to get President Bush’s $700 billion bailout of Wall Street passed – a controversial position that has some critics questioning why the powerful Massachusetts Democrat didn’t do more before the crisis spun out of control.
“You’ve got Barney Frank and George Bush leading the charge,” said state Sen. Robert Hedlund (R-Weymouth). “Here’s a guy whose presidency has been a debacle, and a guy (Frank) who’s been resisting reforms.”
…
Several media outlets noted that Frank, as a ranking member of the committee he now chairs, told the New York Times in 2003, “These two entities Fannie Mae and Freddie Mac are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”
But Frank told the Herald yesterday that “in 2003, nobody that I knew of foresaw the crisis of subprime lending, and that is what caused this problem.”
Bay State Republican state Sen. Richard Tisei of Wakefield, who owns a real estate mortgage firm, said there is plenty of blame to go around, but slammed Frank for claiming the crisis came as a surprise.
“Not only has Frank, but numerous members of Congress have protected Fannie Mae and Freddie Mac for a long time,” Tisei said.
Ralph Reiland at the Pittsburgh Trib-Review:
The roots of today’s mortgage-based financial crisis can be traced back to the Community Reinvestment Act (CRA), which Jimmy Carter signed in 1977. Seeking to address complaints from anti-poverty activists and housing advocates about banks allegedly discriminating against minority borrowers and “redlining” inner-city neighborhoods, the CRA decreed that banks had “an affirmative obligation” to meet the credit needs of victims of discrimination in borrowing.
To add a government stick to the process, the CRA decreed that federal banking regulators would consider how well banks were doing in meeting the goal of more multiculturalism in loaning when considering requests by banks to open new branches or to merge.
A good “CRA rating” was earned by way of increasing loans in poor neighborhoods. Conversely, lenders with low ratings could be fined.
The Fed, for instance, warned banks that failure to comply with government guidelines regarding the delivery of “equal credit” could subject them to “civil liability for actual or punitive damages in individual or class actions, with liability for punitive damages being as much as $10,000 in individual actions and the lesser of $500,000 or 1 percent of the creditor’s net worth in class actions.”
However well-intentioned in terms of delivering “economic justice,” this push for more government-directed social engineering produced a widespread weakening of long-established industry standards for credit worthiness.
Led by Congressional Democrats, this policy of replacing private and decentralized decision-making with a system of centrally-delivered rewards and punishments was basically a one-party effort. Republicans, it seems, were more aware of the unintended consequences that flow from government interference in the market.
Joseph Calhoun at RealClearMarkets: Trust Capitalism
The US government is executing a coup d’etat of capitalism and I fear that we will pay the price for many years to come. Hank Paulson, Ben Bernanke and a host of others tell us the credit market is not working and the only way to get it working again is for the government to intervene. They claim this intervention is urgently needed and if we don’t act, the consequences are dire. Dire, as in New Depression dire. Have these supposed experts on capitalism forgotten how it really works?
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? Given a choice, why would a rational investor allocate limited capital to the losers rather than the winners? If capital is really as scarce as it seems, isn’t it better for our economy if we make sure that it is allocated wisely?
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 “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.
Posted by Jules Crittenden at 10:54 am Comments (1) on Monday, September 29, 2008
One Response to “On Bailouts, Bailing, and Bailing Out”
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September 29th, 2008 at 1:33 pm
I’m not quite as pessimistic as some people about the bailout. We’re essentially replacing one type of meddling with another type of meddling, one that hopefully (thanks to McCain and the Republicans in Congress) will be shorter lived and less damaging than the original problem.
The biggest danger is that this could set some sort of precendent for future government action in similar economic downturns. That would be a big negative.