On Bailouts and Borrowing

I think conservatives are making a big mistake by identifying themselves as the "anti-bailout" people. What's wrong with bailouts? Would these people really have preferred a world where their ATM cards didn't work?

The general impression I get is that the primary impulse of the "A-B'ers" (anti-bailout) is that they want to see people suffer for their sins. Never mind that the people who'd be doing most of the suffering were probably not the sinners. And maybe there weren't so many sinners in the first place. Maybe we just operate in an inherently unstable environment and decisions that may seem defensible at one point can look pretty ridiculous in hindsight.

Maybe we should just admit that we have a system that most of the time works to help create prosperity, but occasionally comes unhinged. When that happens, the best thing to do is to make sure that we piece the thing back together as quickly as possible, then figure out how not to make the same mistakes again.

In the spirit of not making the same mistakes all over again, allow your humble correspondent to make some humble suggestions:

1) Abolish the ratings agencies. Let a market for Credit Default swaps take their place. The ratings agencies either were bought off or utterly failed to evaluate the risk involved in the securities they rated. The problem is that the agencies have no stake in the opinions they promulgate. A CDS is a transaction entered into by two motivated counterparties. Market forces work! A transparent CDS market would be a much more accurate, timely evaluator of the credit-worthiness of businesses than Moody's or S&P.

2) Don't eliminate securitization, just fix it. A simple suggestion: Require securitizers to purchase 10% of every issue they sell and put it on their own books at the price they sell it to everyone else.

My basic premise is that markets are inherently self-correcting, provided all participants are operating on a level playing field. I'd much rather trust buyers and sellers of CDS's who have their own money in the game than a ratings agency paid by the companies they're rating. Likewise, you remove all incentive to deceptively package securities if you're going to have to eat your own cooking.

Where things went wrong in the current crisis was when people put too much trust in parties who had no stake in the outcome of their work.

Perhaps the most egregious abuse of this whole crisis was the debasement of Fannie Mae and Freddie Mac. All Americans should be outraged at the fraud that was perpetrated on investors by these companies. The basic business of these companies is a good one--providing capital to the mortgagae market by applying an implied government guarantee for investors. The reason it worked is that Fannie and Freddie operated under sound underwriting priciples.

Over time, and at the urging of Congress, they got involved in lower and lower quality lending, which in turn helped to fuel the explosion in subprime lending on Wall Street. Foreign investors believed they were buying government guaranteed bonds, then F&F funneled that money into all manner of wild subprime speculation.

Now our government is about to engage in the biggest borrowing in history from the same foreigners that F&F and Wall Street defrauded. Stay tuned....

Does this have to be dire? I don't think so. I mean, it could be dire. You could say that it's already dire. But, does it have to get much worse? I don't think so. Lots of wealth has been destroyed. People have been ruined. Lots of jobs have been lost. But the banking system has been saved. Soon the basic machinery of borrowing and lending will begin functioning again. Have you seen the prices at the pump? Have you priced a car or house or big screen tv? For the 90% + of the workforce that remains employed, this recesson will be a windfall.