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Saturday, September 27, 2008
Flailing firms need backup, but no bailout
The Atlanta Journal-Constitution
For conservatives, the prospect of a $700 billion bailout for financial companies is a huge pill to swallow. Companies that take high-risk gambles and lose should fail. Executives who put them on that course should leave unrewarded. There should be accountability and oversight.
My opposition to the proposed bailout of financial institutions is not based on risk to taxpayers, but on the principle that a direct taxpayer bailout moves the solution from the private-sector managers with a financial stake in salvaging their businesses to politicians who have a political stake in fleecing them.
While lenders and buyers behaved irresponsibly, the launch of the problem is government, and congressional politicians specifically. Why would anybody now want to give them license to more of the mischief that they spawned?
A New York Times article from Sept. 30, 1999, circulated by Randy Lewis of the Georgia Daily Digest Web site, documents at least some of the origins of the problem. It was written by Steven A. Holmes. First paragraph: “In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.”
The start-up effort, involving 24 banks in 15 markets, “will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans” and “Fannie Mae officials say they hope to make it a nationwide program by next spring.” Continuing: “Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.”
What’s happening here — and it’s continuing in the bailout — is that liberals came to terms with Ronald Reagan’s demonization of Big Government by hoisting their social programs onto the private sector or, in the case of Fannie Mae and Freddie Mac, private-sector firms masquerading as public entities backed by taxpayers. A symbiotic relationship developed between politicians and Fannie and Freddie. Bill Clinton was mouthing empty rhetoric in declaring the era of Big Government over. It’s not over. It shifted.
Nothing’s changed, even in time of financial crisis. “Not less than 20 percent of any profit realized on each troubled asset purchased” will go to fund affordable housing, under one of the proposals debated Friday. Sen. Lindsey Graham (R-S.C.) contends the beneficiary of that is ACORN (the Association of Community Organizations for Reform Now), a housing interest group accused of conducting fraudulent voter registration campaigns.
Should the bailout proceed nonetheless? I’m ambivalent, but it is the House Republicans who have the principled position and the one best for taxpayers. Financial institutions are far better at managing the mess they’ve created than a government driven by politicians determined to punish, fleece and coerce them into becoming extensions of government. I don’t trust meddling politicians.
We are potentially talking big money. Andy Kessler, a former hedge fund manager and author, writing in The Wall Street Journal, opines that the bailout “could net a trillion dollars and maybe as much as $2.2 trillion” for the Treasury. I am convinced that, without the meddling politicians playing in the pool, the bailout will ultimately recover all public money put at risk, and more. The primary problem is panic.
Give them time and a steadier market to deal with their problems and this unhealthy symbiosis among taxpayers, politicians and financial institutions can be limited. Government action is essential, yes, but the House Republicans have the better approach with an insurance pool for bad mortgages that would allow the companies to work through their own problems. Keep Barney Frank off Wall Street. Keep the politicians off, too, who are looking for post-career riches.
There are lessons to be learned here. One is don’t direct private companies to be social service agencies. Build transparency and accountability into public-private relationships, which always should be kept at arm’s length. Government shouldn’t be in the business of picking industrial or financial winners, nor should it determine when executive compensation in the private sector is too much.
People who made bad decisions should fail. That applies, of course, only to the private sector. Politicians are never held accountable for the regulatory and other decisions they make that invite ruin.
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