The Bailout

It has passed, of course. Now, the questions is whether it will actually do anything to alleviate the current financial crisis. The fear is that it will not; there are serious concerns that the bailout has been passed too late to affect anything. I suppose that this is the reason why more bailouts might be on the way.

I would have had an easier time supporting this bailout if along with its passage, we agreed on the proposition that subprime mortgage loans are, in general, a very bad idea. One would think that it would now be easy to establish a political consensus around the belief that home loans ought not to be given to people with poor credit, few means with which to pay the loans back and shaky life histories that show no semblance of stability and/or the capability to hold and keep a steady job. Of course, it will be next to impossible to establish this consensus because of the continued belief in the need for as many Americans as possible to own their own homes. Why this magical belief should continue to persist in light of the subprime catastrophe is anyone’s guess. By now, we should have learned that renting ain’t so bad, that home ownership is not for everyone and that pursuing the dream of home ownership with the kind of religious zeal we as a nation have demonstrated will only lead to more dubious loans being given out, more housing gluts, more defaults on mortgages and more havoc in the financial markets. Absent this consensus, supporting a bailout is like trying to put a band-aid on the gaping hole in what used to be one’s chest after a rocket-propelled grenade found its mark.

As appalling as the bailout is the storyline that accompanies it; the storyline that “unregulated” capitalism is responsible for the current financial mess. Fatuous nonsense. As Russell Roberts points out, Fannie Mae, Freddie Mac and the policies stemming from the Community Reinvestment Act were responsible for getting us into this mess because they insistently pushed subprime loans onto the rest of the country. These were government failures, not market failures. Government was responsible for giving us this mess and now, the very denizens of government who backed the policies that led to this mess have the gall to lecture the business community on the dangers of “unregulated” and untrammeled capitalism? Milton Friedman is somehow to blame for all of this? Were the times not more serious, awards ought to be handed out for sheer chutzpah.

To the extent that government is blamed, the blame usually falls upon former government officials who have ties to the McCain campaign, according to the narrative of the moment. Thus, government’s only screw up supposedly constituted allowing former Senator Phil Gramm to pass the Gramm-Leach-Bliley Act. Problem is that GLB had and has nothing to do with the current crisis and even high-ranking, partisan Democrats understand that. Why no one else does is a mystery to some, perhaps, but my theory is that those who don’t understand may well just be pretending not to understand because they believe such pretense is the easy path to votes in November. Coincidentally, many of those pretenders either are working directly for an Obama victory or are cheering on the sidelines for an Obama victory. They call themselves the “reality-based community.” Feel free to laugh at the irony of it all.

When you are finished laughing, consider that when it comes to the bailout, we created our own policy reality. It was the bailout or nothing, according to the arguments we heard in the media and from the political class. With the national construction of this strawman, we enacted dubious legislation. There is a serious danger that we acted out of sheer panic. I am not accusing anyone of lying about the dangers of the current economic crisis–I don’t pretend that we are living in times of growth and prosperity. But as Ilya Somin points out, “We should not forget the example of the Great Depression, when many harmful policies were imposed in the name of immediate necessity – policies that failed to end the Depression as had been hoped, but did benefit powerful interest groups in ways that often imposed great harm on the general public.” Alas, it would seem that we went ahead and did just that. A significant consensus across the ideological spectrum amongst economists concludes that the bailout was a bad idea and we just went ahead and ignored it.

I hope that we were right in ignoring it. I fear that we weren’t and that we will repeat the error in the coming months for future bailouts that amount to nothing in the quest to find the policy silver bullet that will ameliorate the current crisis in the financial markets. By the way, note that I am calling this package a “bailout.” I know that there are people who think that this is bad labeling and bad framing and argue that it should be called a “financial rescue package” instead, so that we can sound noble and chivalric as we ride to the salvation of the economy. To which I say nomina sunt consequentia rerum. The least we can do in enacting this big government stopgap is to call it what it is. Sugarcoating its proper name won’t make the legislation look any prettier.