Friday, September 26, 2008

So what would happen if Congress did what it's best at: nothing

The best analysis of a no bail-out/no sell-out scenario is at Red State. You should read the whole thing, but here's the gist:

What happens if we let Mr. Market handle the problem all by himself?

At this point, credit markets are largely frozen in place, waiting on Congress to excrete or get off the pot. Financial institutions are extremely reluctant to lend any money to each other, even overnight, for fear of trading with someone who will declare bankruptcy tomorrow.

That means the normal ebb and flow of ordinary commerce around the world is severely impacted. Every day we wait is forgone economic activity that will never come back, and over time that will make the economy smaller than it would have been. That means job losses and smaller retirement savings accounts.

Now what if Congress pulls the plug and adjourns without doing anything?

The credit crunch will then resolve itself with a large wave of bankruptcies by banks and financial firms, large and small, around the world. This will most likely happen with breathtaking speed, far faster than any similar financial re-alignment in history. The Fannie/Freddie/Lehman/AIG/WaMu failures will be the tip of the iceberg.

Now, lost in this maelstrom will be a great many financial institutions that are basically solvent and could hold on otherwise. There will be a lot of wreckage out there, and a lot of damage to stock-market and commodities prices, which in turn will hurt the retirement savings of ordinary people.

Where will it end? That’s a good question. My guess is that it will work like a defibrillator applied to a stopped heart. It will take months to sort out, but new credit structures will arise quickly to replace the old ones.

And the Federal Reserve will step in to provide the additional liquidity needed to get over the hump. They may take steps like reducing interest rates to zero, and opening their discount window facilities even wider.

And significant co-operation will be required with foreign central banks, because this will be a global problem

This sounds bad, and it is. On the other hand, it's the steady wit and wisdom of North Carolina Libertarian candidate for Governor Dr Michael Munger that keeps things in perspective:

The situation is bad, but not so bad that a bunch of panicked politicians can’t make it worse.

Think of it this way: we invaded Iraq in 2003, and we've been repenting that decision ever since, to the cost of about $583 Billion to date.

Now, we're seriously contemplating allowing the same Presidential administration, dozens of the same Senators, and hundreds of the same Congressmen who thought that was a good idea at the time to commit to spending what might be TWICE THAT MUCH in a single week.

Even I--Libertarian that I am--have to ask the common-sense question: Assuming that the sell-out is inevitable, why are we bailing out the banks and not the people who stand to lose their homes?

And you wonder why we Libertarians don't trust the government.


Delaware Watch said...

Funny, I think the problem began because Congress decided o n a course of doing next to nothing--not adequately regulating these markets.

Tyler Nixon said...

What a joke. Obama, Dodd, Frank and others - the congressional whores of Freddie and Fannie - resisted attempts at stronger oversight for years.

It was all about looking the other way to make the mortgage market so sloppy that "poor" people could 'buy' houses they couldn't afford.

As a result, just a few years on we have a nation beset with bad debtors facing dispossession from their homes and who may never again have a shot at owning their own house.

Better that we had not let this simpering crowd of social engineers ruin the lives of so many relatively-vulnerable lower income Americans by enabling an overextended pipe dream of home ownership WAY beyond their actual means. But all that sweet cash into the pockets of Dodd and Obama was not worth responsible actions when everyone was getting homes without income or assets, not to mention all that easy money flowing out of the mortgage mills. Dodd, Obama, and Frank treated FNMA and FHLMC like a Dave Del Dotto get rich quick no-money-down scam.

The absurd contortions trying to somehow blame Republicans for a Democratic-niche financial mess are dizzyingly circular if not nonsensical. First they blame Republicans for being too cozy with corporate interests. Now they blame Republicans for resisting a mind-bogglingly huge bailout of said corporate interests. Jesus, which is it? These statists' bottom line is all too apparent. They are more than willing to expand government, even if it means welfare for the very constituencies they accuse Republicans of protecting. Such dizzying hypocrisy...

Their tired hackneyed histrionic ploy is back in fashion : blame their big government failure on its lack of bigness and offer even bigger bigness, with plenty of more billions funneled to their corporate donors, while they bleat on with pandering lies about protecting "Main Street".

I really don't know how you can ever work for solutions in good faith with people who are so logically disarrayed and so politically doctrinaire - stuck on stupid and rushing us headlong to national socialism.

Steven H. Newton said...

Actually, Dana, I wouldn't agree. Congress did plenty to get us in this mess; apathy wouldn't have.

Congress in the past eight years systematically changed regulations to allow banks and brokerage houses to operate with far slimmer margins and failed to address the thorny issue of derivatives at all. Big GOP failure.

But in the four years before that, Congress not only approved but mandated that Freddie and Fannie change their lending standards to include more of the sub-prime market. This created pressure for all lenders to accept more loans that did not meet tough banking standards. That's why there was all that extra bad paper out there for the banks to play with. [That's also why the mortgage insurance industry enjoyed its brief flimflam heyday.] Big Dem failure.

If, quite frankly, they'd all left things alone from 1997-2007 rather than doing stupid things we would still have some mess to contend with (based on the failure to adapt regulatory practices to derivatives even after the warning Hong Kong failures in the late 1990s), but we wouldn't be contemplating a trillion dollar taxpayer rip-off right now.

Delaware Watch said...

"apathy wouldn't have"

apathy doesn't mean doing nothing; it means not caring about the consequences, which is precisely my point

By not adequately regulating these markets, Congress & 2 prezs created this mess and they didn't care about the predictable consequences of unfettered greed set loose