This must be the biggest week for Rudyard Kipling quotations in a long time:
If you can keep your head when all about you
Are losing theirs and blaming it onyou. . . .
Every knowledgeable observer agrees that the world economy has narrowly avoided the most severe credit crunch since the Great Depression, and that the margin of escape was frighteningly narrow. It’s still possible, in fact, that the rescue plan stitched together by Secretary Paulson will unravel. The garment is ugly and ill-knit. Those who are supposed to don it may be tempted to tug at the loose ends; some of them may not truly want it to hold together. The joy that rang out in the sinistrosphere when the crisis was at its worst hints that not everyone would be saddened by further turmoil.
If all investors and lenders were acting rationally, the Paulson Plan would never have seen the light of day or, if it did, would be laughed to scorn. Unhappily, the essence of a panic is irrationality, and there are only two ways to deal with it: Either let the markets find their bottom, or overpower panic with an outsized bailout. The former choice would mean several miserable years for the whole world. If I were the Universal Dictator, I would take it, muttering haec olim meminisse iuvabit, confident that men a decade hence would praise my foresight.
Statesmen in the real world don’t have the luxury of time. The Bush Administration must practice the art of the possible. It has, at least, remembered the one great truth about panics: For those who can hold for the long term, there is no better time to buy. The United States Treasury can hold for a longer term than anybody else. Unless we are doomed to reversion to the Paleolithic, Mr. Paulson’s $700 billion commitment will eventually be the most profitable speculation in the history of finance, although the details of his scheme will undoubtedly need rectification as time goes on. There’s a danger that the mentality that drove the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) into the ground will resurface, leading to a renewed crisis in the future. It’s also possible that this huge federal beachhead into the private sector will be followed by an expansion of government control or will encourage hopes for taxpayer-funded subventions to any sector of the economy that encounters turbulence.
How well the bailout is handled will ultimately depend on what historical lessons politicians and the electorate draw from the events that precipitated it. The Left has already started making its reflexive case: Deregulation is at fault; we need the firm but gentle hand of the government to prevent a repetition.
Leftists will keep repeating that line, regardless of its utter detachment from reality, spinning theories as to how “tax cuts for the rich” or the repeal of the Glass-Steagall Act somehow caused all our problems. In Tuesday’s Wall Street Journal, Charles W. Calomiris and Peter J. Wallison explain, au contraire, why the housing meltdown was a massive failure of government intervention:
Many monumental errors and misjudgments contributed to the acute financial turmoil in which we now find ourselves. Nevertheless, the vast accumulation of toxic mortgage debt that poisoned the global financial system was driven by the aggressive buying of subprime and Alt-A [just above subprime] mortgages, and mortgage-backed securities, by Fannie Mae and Freddie Mac. The poor choices of these two government-sponsored enterprises (GSEs) – and their sponsors in Washington – are largely to blame for our current mess.
How did we get here? Let’s review: In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of “affordable housing.” They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. In doing so, they stimulated the growth of the subpar mortgage market and substantially magnified the costs of itscollapse. . . .
[B]eginning in 2004, their portfolios of subprime and Alt-A loans and securities began to grow. Subprime and Alt-A originations in the U.S. rose from less than 8% of all mortgages in 2003 to over 20% in 2006. During this period the quality of subprime loans also declined, going from fixed rate, long-term amortizing loans to loans with low down payments and low (but adjustable) initial rates, indicating that originators were scraping the bottom of the barrel to find product for buyers like the GSEs.
The authors go on to retell the story of how the Bush Administration and Congressional Republicans tried to reform the GSE’s:
In 2005, the Senate Banking Committee, then under Republican control, adopted a strong reform bill, introduced by Republican Sens. Elizabeth Dole, John Sununu and Chuck Hagel, and supported by then chairman Richard Shelby. The bill prohibited the GSEs from holding portfolios, and gave their regulator prudential authority (such as setting capital requirements) roughly equivalent to a bank regulator. In light of the current financial crisis, this bill was probably the most important piece of financial regulation before Congress in 2005 and 2006. All the Republicans on the Committee supported the bill, and all the Democrats voted against it. Mr. McCain endorsed the legislation in a speech on the Senate floor. Mr. Obama, like all other Democrats, remained silent.
In a nutshell –
The proximate cause of the near-collapse of credit markets around the world was Fannie Mae’s and Freddie Mac’s reckless lending.
The proximate cause of their ability to act recklessly was the failure of reform efforts in Congress.
The proximate cause of reform’s failure was the rock solid opposition of the Democratic Party.
The proximate cause of Democratic opposition to reform was the party’s inability to grasp elementary economic principles or its unwillingness to embrace them when they conflicted with short-term political advantage.
On the most important economic issue of the new millennium, the party of the Left was drastically wrong. Its representatives deserve blame equal to what they heaped on Herbert Hoover 75 years ago. They won’t, needless to say, recognize their responsibility and hang their heads in humiliation. Instead, they hope that the consequences of their own misjudgements will bring them to power.
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