[Guest post by DRJ]
In our continuing effort here at Patterico.com to bring you both sides of every issue, and sometimes 3-4 sides, here is my counterpoint to Patterico’s post expressing concern about the recent Fannie Mae, Freddie Mac, AIG, and TARP bailouts. Unlike many conservative-minded bloggers, I’m not a libertarian although I used to be. Now I’m a pragmatic conservative and these are my views on the bailout:
John McCain was right when he said there are problems but the fundamentals of the economy are strong. Here’s how New York Mayor Michael Bloomberg expressed it:
“I do agree that fundamentally America has an economy that is strong,” he said. “America’s great strength is its diversity, its hard work, its good financial statements, its broad capital markets, its enormous natural resources” and its work ethic, he said at an afternoon press conference devoted to reassuring New Yorkers that the city’s finances and its economy are intact.
“I’d rather play America’s hand than any other country,” he said. “Without problems? No.”
In my view, the bailouts primarily resulted from dramatic expansions in personal and business credit since the 1980’s coupled with a housing bubble that has been building since the 1990’s, all of which were aggravated by recent weakening in business and consumer confidence. This crisis in confidence led to a system-wide “run on the bank” as investors redeemed their assets from investment funds to hold until the market stabilized.
This is not unlike bank runs from the early 1900’s that were ultimately remedied by increased banking oversight and the creation of the FDIC in 1933. These were not solutions that made libertarians happy because they involve government intervention but, as a conservative, I believe stabilizing the banking system is an appropriate and vital function by government to protect the economy. The alternative would have been a return to a limited, insular economy where people hoarded assets.
I think recent developments are a recognition that people don’t put their wealth solely in banks anymore. Fifty years ago, the average family owned a house, a car, and furniture and put its savings in banks. Few people other than the wealthy purchased stocks and bonds. Today’s families put their money in a broad range of investment vehicles. It’s no longer enough to protect business and consumer confidence in the banking system. Government oversight that brought stability and confidence to banking are now necessary for the broader investment markets.
Of course, it would have been better if Congress had addressed the economy with thoughtful and incremental adjustments over time, as opposed to the all-or-nothing approach to regulation and deregulation (on just about every topic) that it currently favors. But it’s been clear for years, perhaps even for decades, that American politicians won’t solve big problems until they become crises and, so far, Americans have been unable or unwilling to change that. See, for example, Medicare and Social Security.
So it’s not surprising that Washington politicians fiddled for decades on these issues but it’s noteworthy how quickly Treasury, the Federal Reserve, and to a lesser extent the SEC moved in recent days. This may have transpired in days but the Bush Administration was clearly prepared even if Congress was stunned. (Note: I’m not a Bush apologist. The Bush Administration asked for or allowed massive discretionary spending for 7+ years, making this bailout much harder to pay for than it should be. However, it’s also hard to overstate how unprepared the Democrats obviously were to deal with this issue. Think Ray Nagin during Hurricane Katrina.)
I want to make it clear that I agree with this Investor’s Business Daily editorial. The problem isn’t deregulation vs regulation. The problem is the need for modern oversight and regulations that keep up with what’s happening in the markets. Despite the affinity for “change” expressed by many liberal Democrats, their representatives and senators in Congress have been committed to the status quo when it comes to modern banking and investment oversight.
Do I wish this wasn’t necessary? Absolutely, but I’m not surprised that conservatives like Paulson and Bernanke would opt for a solution that values financial stability and reinforces business and consumer confidence. And, finally, I hope the Congressional legislation that results from this includes as much emphasis on transparency as it does on oversight.