Except the voice of reason
October 1, 2008 | Total breakdown. Of the economic, social, and political systems. Total breakdown.
At the end of last week, all the powers-that-be were predicting imminent catastrophe if a $700B
bailout plan were not passed, immediately, if not sooner. Pooh-bahs and politicians worked late into the night to craft a plan before the markets opened — in Asia, in Europe, and on Wall Street. On Monday one "leader" after another trooped to the microphone to proclaim victory; a compromise had been reached, light was at the end of the tunnel, all that remained was to take the vote.
Then they took the vote in the House. The plan went down to defeat! Armageddon is at hand! The Dow Jones Industrial Average suffered its greatest one-day loss ever, ending down 777 points. Poof! A trillion dollars in market value disappeared, just like that.
Let's start by noting that the market drop wiped out more value than the presumed cost of the "rescue" and, by all accounts, there will still have to be a rescue plan on top of that!
What happened? For one thing, Washington was deluged by phone calls and emails almost unanimously opposed to the deal. Talk radio and talk TV inveighed against the "bailout." A populus that has watched the fat cats of business take home multi-million dollar salaries and bonuses while their own wages have remained stagnant, that has watched eight years of the rich getting richer and the poor getting poorer, rose up and said, "We're mad as hell, and we're not going to take it any more!"
For another thing, the "leaders" underestimated the willingness of conservative House Republican ideologues to defy their own party. These are the mostly young Republicans who really believe — or think they do — in Ronald Reagan's government is the problem, cut taxes, cut expenses, cut everything, the people be damned approach to government. They'll stand by their "principles" even if it means the country goes down the tubes as a result.
Then some funny things happened on the way to the end of the world as we know it. On Tuesday the market came roaring back, reversing over half the previous day's loss. Then the voices shouting "No, no way, no how!" suddenly began clamoring for the government to do something, anything, to take away the pain.
A simple truth reasserted itself once again: public opinion is a poor substitute for public policy, especially when that opinion is whipped up by demagogues, ideologues, and muckrackers and seasoned with ignorance — and I mean ignorance in the sense of being ignorant of, of not knowing, not understanding.
Another idea is likely being reinforced in people's minds: See, it wasn't so bad, they were just crying "Wolf!" again, just like they've done so many times before in an effort to get their way.
There are many people out there who are willing to believe that the economy, specifically the credit market, is genuinely in deep trouble, in large measure because those fancy financial instruments invented by the investment banks are of uncertain value. (It's not that they're worthless — they're almost certainly not — but that investors simply can't figure out how much they are worth. And it is a truism that the market does not like uncertainty.) But they are also not at all sure that the only way, or even the best way, to solve the problem is to simply take those questionable assets off the hands of the financial firms, allowing them to go back to business as usual.
Not only is it inherently unfair and morally repugnant to bail out the very people who got us into this mess, it may not work! The whole approach to the rescue was framed by Treasury Secretary Henry Paulson, formerly of Wall Street, and because of the urgency, pragmatic people tried to figure out ways to make the plan better rather than ask the question, "Is this the best plan?" The opponents to the plan really do have a point when they complain that other alternatives have not been considered.
I recently opined Chronicles, Sept 25, 2008 that if mortgages are at the root of the problem, then we maybe should be attacking the crisis there rather than at the top, hoping for a trickle-down solution. In today's Washington Post, two Yale professors argued for a Trickle-Up Bailout: "There is an easier and more politically palatable fix: Pay off all the delinquent mortgages."
The financial crisis is a liquidity crisis, yes, but it is ultimately a product of homeowner failures to pay. Unless this fundamental problem is fixed, we will continue to see -- and need to treat -- the symptoms. The proposed bailout ignores this. Yet the sum being demanded from taxpayers is almost certainly more than sufficient to pay off all currently delinquent mortgages.
If the government did this, all the complex derivatives based on these mortgages would be as good as U.S. Treasuries. Their fair value would jump to 100 cents on the dollar, rescuing teetering financial institutions. The credit markets would be resuscitated overnight. Foreclosures would stop.
They point out that there is a precedent for such an approach and an existing government infrastructure that could implement it. And, they have an answer for those who would object to "rewarding" those who overextended themselves: "it is a small price to pay to avoid ... the collapse of our financial system."
Lest anyone doubt that the problem is severe, and lest anyone doubt that people have ceased acting rationally, consider another thing that happened this morning: A Chicago woman won the bidding on eBay for an abandoned home in Saginaw, Michigan, for just $1.75 (NY Times). There were only seven other bidders. She'll have to pay about $850 in back taxes and yard clean-up costs, but the house, or even just the vacant lot, will certainly be worth much more than that at some point in the future.
Now, where's my eBay logon?
Last updated on Apr 13, 2018