Oppose the bailout

[R.R.]

An Open Letter to Ben Bernanke
Arnold Kling

Dear Ben,
The Wall Street Journal reports,



"If it doesn't pass, then heaven help us all," responded Mr. Paulson


He is referring to legislation to authorize the next round of bailout activity by the Treasury, with rules, methods and accountability all to be determined. You should oppose this legislation. It is an attempt to avert a financial meltdown by means of a political and fiscal meltdown.

I fear you may be seeing this crisis through the lens of the Great Depression. Then, the wave of bank failures was an element in the severity of the downturn. However, keep in mind that there is still controversy over the relative weights of various causes of the Depression, and not everyone is convinced that bank failures per se were the main factor.

Today, it is clear that the U.S. financial sector needs to shrink. As another one of your former classmates, Ken Rogoff, has pointed out, the financial sector has accounted for an unusually large share of corporate profits in recent years. It is time for this country to shift talent and capital elsewhere. In order for that to happen, some firms in the industry need to tighten their belts, some weaker firms need to merge with stronger firms, and the weakest firms need to fail. As tempting as it is to intervene in this process to try to make it more orderly, dislocation is inevitable, and intervention may only make it worse.

We have excesses. Too many housing units. Too many "homeowners" who don't have equity in their homes and never did. Too many banks and financial institutions. The excesses need to be worked out by the markets.

Henry Paulson is not the first strong Treasury Secretary to appear in a crisis. John Connally held that job in the Nixon Administration, In response to a run on the dollar, he abandoned the Bretton Woods agreement and introduced wage and price controls. In the short term, this was well received, and it allowed the economy to rebound in time for Nixon's re-election. In the long run, it was a disaster, ultimately unleashing virulent inflation and, as oil prices rose, leading to the painful disorder of rationing and lines at gasoline stations.

Connally's cure was worse than the disease. I strongly suspect that Paulson's cure will prove similarly harmful.

My suggestion to you is that you get out of your financial industry cocoon for a while. Talk to people who are concerned about the direction that policy is taking, including former colleagues of yours in academia. A Central Banker should stand up to fear-mongering. Even when it comes from a Treasury Secretary.

http://econlog.econlib.org/archives/2008/09/an_open_letter.html

[Xavier_Onassis]

There are not too many housing units. There are still people who are homeless.

[R.R.]

You should invite a homeless person to live in your home. They are broke and hungry. You should let some stay with you.

[Xavier_Onassis]

I was simply pointing out that there is not a housing shortage. There is a shortage of methods by which the homeless could afford their ow homes. There is no homelessness in Denmark, after all, so obviously there are solutions.

If there were too many housing units, then the solution would be to destroy excess housing units. Since the author of your mini-screed does not advocate this, it indicates that not even he believes that there is a shortage.

I think the bailouts are a disgraceful solution. Had there not been too much deregulation, then banks would not have been able to bundle mortgages and pass off bad loans as good ones. Unregulated capitalism does not work. As any study of the US economy has shown, unregulated capitalism produces a panic, crisis, bust or depression with amazing regularity.

Snide remarks about how I should invite homeless people to live with me are not useful to the debate.

[R.R.]

Snide remarks about how I should invite homeless people to live with me are not useful to the debate.

What is so snide about it? If you see a homeless person, why wouldn't you give him shelter? You live in a nice comfortable home I presume, and he doesn't. Why not share it?

I don't know what the author was getting at there. My view is that there are too many homes on the market and there are too many homes that are being foreclosed, due mainly to weak lending standards condoned by Fannie and liberal politicians. These are people who should never have bought a home in the first place. 

[Xavier_Onassis]

I live in a small house. I have no room for others.

Lenders should not have lent money to people who had no income or jobs. This was only possible because such loans could legally be bundled and sold as much less risky loans to banks, who then peddled them all over the place as lucrative investments.

People were told that they could buy a home for less than renting one. Mortgages were hawked just as Visa Cards are hawked. Many people have no idea what they can afford. They have been told they can afford everything, and are encouraged to charge useless crap like overpriced souvenirs and refreshments at ballparks.

This was possible because of a bill ex- Texas Sen. Phil Gramm got passed, after he and his wife ended their stint with Enron. He was a Republican, and widely allowed himself to be labeled a "Conservative", rather than "shill for a consortium of thieves".

[Xavier_Onassis]

I don't know what the author was getting at there. My view is that there are too many homes on the market and there are too many homes that are being foreclosed, due mainly to weak lending standards condoned by Fannie and liberal politicians. These are people who should never have bought a home in the first place.

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If you do not understand it, why post it?

The author is vague. There are reasons not to bail out unsuccessful banks, but he gives no intelligible reasons.
I agree that the people should not have been given loans in the first place.

[R.R.]

I live in a small house. I have no room for others.

You seem to take a fend for yourself attitude.

Lenders should not have lent money to people who had no income or jobs. This was only possible because such loans could legally be bundled and sold as much less risky loans to banks, who then peddled them all over the place as lucrative investments.

Fannie Mae also bought the loans when they lowered their standards.

People were told that they could buy a home for less than renting one. Mortgages were hawked just as Visa Cards are hawked. Many people have no idea what they can afford. They have been told they can afford everything, and are encouraged to charge useless crap like overpriced souvenirs and refreshments at ballparks.

I have no disagreements with any of this, though I believe most people knew they couldn't afford the homes but bought them anyway because they thought they could flip them. Liberal Democrats pushed these low interest loans to get their low income constituents into housing. 

This was possible because of a bill ex- Texas Sen. Phil Gramm got passed, after he and his wife ended their stint with Enron. He was a Republican, and widely allowed himself to be labeled a "Conservative", rather than "shill for a consortium of thieves".

It's a little more complicated than that because it deals with the credit default swap market, but this was a measure that was bipartisan. Clinton was for it, Larry Summers was for it, and Bob Rubin was for it. Most Democrats were for it. Clinton signed it into law. Put your copy of Mother Jones down and be objective.

[Xavier_Onassis]

I have no disagreements with any of this, though I believe most people knew they couldn't afford the homes but bought them anyway because they thought they could flip them. Liberal Democrats pushed these low interest loans to get their low income constituents into housing.

Quote
This was possible because of a bill ex- Texas Sen. Phil Gramm got passed, after he and his wife ended their stint with Enron. He was a Republican, and widely allowed himself to be labeled a "Conservative", rather than "shill for a consortium of thieves".

It's a little more complicated than that because it deals with the credit default swap market, but this was a measure that was bipartisan. Clinton was for it, Larry Summers was for it, and Bob Rubin was for it. Most Democrats were for it. Clinton signed it into law. Put your copy of Mother Jones down and be objective.


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Liberal Democrats. Yeah, sure. Maybe 1% of all loans might have been issued by "liberal Democrats".

You are the one not being objective. Recognize please that loans are granted by people who financially benefit from granting said loans. Nearly everyone who approved these loans did what they did because they got paid, not because they wanted someone to vote for them. Their party affiliation was insignificant.

The credit swap market law should never have been passed at all, I do not give a sh*t who passed it. Gramm wrote the fool thing and he deserves a major share of the blame. Anyone and everyone who voted for it also deserves some of the blame.

Since you appear to be against the bailout, what do you propose instead?

I suggest that telling me to put down my copy of MJ is not going to help. I haven't read MJ for over a year, by the way.
 I had absolutely NOTHING to do with this mess. Like you, my taxes will be used to pay to solve it, though. I paid off my home in 1989. I could have moved to a better neighborhood, but it is a convenient place to live and I have grown to like it. Low taxes grandfathered in, no threat from flooding, because it is 30 feet higher than most of the county, easy access to all the highways. I do not see why I should provide lodging for the homeless. I do have a fend for myself attitude. I see nothing wrong with that. If you do, tough.