KeyÂing off an opinÂion piece by Paul KrugÂman, Eric RauchÂway, an AmerÂiÂcan hisÂtoÂriÂan (and also an old grad school colÂleague of mine), offers an intriguÂing analyÂsis of the Bush/Paulson bailout and how it comÂpares to the Hoover and FDR bailouts from the DepresÂsion era. The difÂferÂence between 1932/33 and 2008? In 2008 (get text of leaked plan here), ConÂgress will have no overÂsight and the execÂuÂtive branch will be “beholdÂen to nobody and subÂject to no review.” (Sound vagueÂly familÂiar?) There will also be no statÂed restricÂtions on how much a givÂen corÂpoÂraÂtion can be assistÂed, and no requireÂment that corÂpoÂraÂtions give the govÂernÂment anyÂthing back in turn. (There’s not even a requireÂment that the govÂernÂment buy the bad debt for fair marÂket valÂue.) Back in the 30s, howÂevÂer, “All loans had to be secured, couldn’t be made on forÂeign secuÂriÂties or accepÂtances, no more than 5% of the monÂey could go to any one comÂpaÂny, couldn’t exceed three years’ term, couldn’t pay fees or comÂmisÂsion to appliÂcants for loans, and so forth. RailÂroads acceptÂing such loans had to do so under terms acceptÂable to the regÂuÂlaÂtoÂry InterÂstate ComÂmerce ComÂmisÂsion.”
The idea of handÂing the Bush adminÂisÂtraÂtion anothÂer blank check is hardÂly a hapÂpy one. We’ve been down that road before and things didÂn’t exactÂly go smoothÂly. But then again I’m not sure that the 1930s offers wonÂderÂful modÂels for catÂaÂstroÂphe manÂageÂment (not that RauchÂway is sayÂing that). Let’s hope that our leadÂers take a litÂtle time to think things through.
And, by the way, New Rule: No one on Wall Street should be allowed to make more than six figÂures until they’ve cleaned up their mess and reimÂbursed the taxÂpayÂers. Yes, wishÂful thinkÂing I know, since apparÂentÂly Lehman, even havÂing gone bankÂrupt, has found a way to a share a $2.5 bilÂlion bonus pool.
HandÂing anyÂone in govÂernÂment a “blank check” is a bad idea. HowÂevÂer, if I were forced to take that gamÂble, I would put my monÂey with repubÂliÂcans. After all, this mess came about because of the failÂure to rein in the GSEs, and that can be laid squareÂly at the feet of the democÂrats. As Charles Calomiris and Peter WalÂliÂson recentÂly notÂed in the Wall Street JourÂnal (http://online.wsj.com/article/SB122212948811465427.html), if the democÂrats had let repubÂliÂcan-sponÂsored legÂisÂlaÂtion in 2005 to come up for “a vote, the huge growth in the subÂprime and Alt‑A loan portÂfoÂlios of FanÂnie and FredÂdie could not have occurred, and the scale of the finanÂcial meltÂdown would have been subÂstanÂtialÂly less.” HowÂevÂer, the democÂrats were big supÂportÂers of this reckÂless lendÂing because it supÂportÂed their “affordÂable housÂing misÂsion”.
Hanoch, That is a hard arguÂment to make when you conÂsidÂer the very simÂple fact that the RepubÂliÂcans owned every branch of govÂernÂment durÂing the makÂing of the real estate bubÂble. But it’s a nice try. And thanks for your conÂtriÂbuÂtion.
Dan
Not a very perÂsuaÂsive point, Dan. Take a look at the judiÂcial nomÂiÂnaÂtion process if you think it is easy for a slim majorÂiÂty in ConÂgress to enforce its will over vigÂorÂous oppoÂsiÂtion.
The botÂtom line is that, long before the curÂrent mess, the most vocal critÂiÂcism of the GSEs came from the right. I am no cheerÂleader for the repubÂliÂcans when it comes to fisÂcal responÂsiÂbilÂiÂty. UnforÂtuÂnateÂly, howÂevÂer, when you look at the alterÂnaÂtive, there realÂly is no choice.
So the 2005 bill would have preÂventÂed FanÂnie and FredÂdie from keepÂing a portÂfoÂlio, and in turn, a portÂfoÂlio full of bad loans. This is admitÂtedÂly a good idea. But wouldÂn’t that just lead to othÂer banks buyÂing up the bad loans that would have endÂed up in the Fannie/Freddy portÂfoÂlio? WouldÂn’t this probÂlem still exist? FanÂny and FredÂdie are essenÂtialÂly priÂvate comÂpaÂnies now right? So how can you exclude them from holdÂing porÂfoÂlios? Maybe that was the DemocÂraÂt’s thinkÂing?
Hanoch and Peter seem anxÂious to pin this on the democÂrats, but I agree with Dan, nice try. What about Phil Grahm, debt ratÂing agenÂcies, lack of auditing/regulating loan origÂiÂnaÂtors. This donÂkey has many tails.
Not to menÂtion, weren’t the RepubÂliÂcans the majorÂiÂty in 2005. How did the DemocÂrats take this off the majorÂiÂty’s table? ObaÂma’s been on ForÂeign RelaÂtions, HomeÂland SecuÂriÂty, Health and EduÂcaÂtion comÂmitÂtees, not finance comÂmitÂtees, maybe it wasÂn’t his place to be makÂing finance laws?
Matt, I am not “anxÂious to pin” the blame on the democÂrats. On this issue, howÂevÂer, it seems that, as between the democÂrats and repubÂliÂcans, the repubÂliÂcans genÂerÂalÂly had it right. It is thus odd to suggest–as the origÂiÂnal post did–that the repubÂliÂcans are the less trustÂworÂthy parÂty for impleÂmentÂing a bailout.
If you don’t care for the WSJ artiÂcle, here is one from IBD which also describes the genÂeÂsis of this mess:
http://www.ibdeditorials.com/IBDArticles.aspx?id=306632135350949