Bailout link dump

Perspective worth reading on the mortgage crisis and the proposed bailout, going before the U. S. Senate today:

Dave Ramsey's Common Sense Fix: Government insurance for mortgages in exchange for rolling back payments into current balance, fixing the rate, and canceling prepayment penalties; remove "mark to market" accounting for two years on Tier III subprime loands; completely remove capital gains taxes.

Mark Sanford - A Bailout for All Our Bad Decisions? - washingtonpost.com

For 200 years, the "business model" in our country has rested on a simple fact: that while one may reap rewards from taking risks, one should also be prepared to face the consequences of those risks. Some of the proposed actions with regard to the credit market turn that business model on its head -- absolving those who took too much risk, or bought too much house, from the weight of their own choices. If Congress passes the proposed bailout, we will be destined to have far greater problems in time, leaving those who are prudent in their finances to foot the bill for those who are not....

Last week's events were rooted in distressed mortgage securities whose optimistic values were facilitated by quasi-governmental entities Fannie Mae and Freddie Mac. The investment banking capital write-downs were turbocharged by the Sarbanes-Oxley Act, which did what too many laws do -- it fixed yesterday's problem. The amazing expansion of credit was fueled by a Federal Reserve offering an easy-money policy that led us right into a credit bubble. All this was made worse by the government enabling some people's tendency to want more house than they can afford.

With that bubble popped, we will now go through a major financial de-leveraging. It will be painful. Yet to preserve what has made this country great, we need to be on guard against Washington offering endless cures to our ills.

U.S. Congressman Mike Pence : 6th District Of Indiana: Pence opposes Bush administration bailout plan

Americans for Limited Government letter to Congress against the bailout

American Thinker: Barack Obama and the Strategy of Manufactured Crisis: The Cloward-Piven Strategy, ACORN, Jim Johnson, Franklin Raines, Penny Pritzker, and the Democratic nominee.

Ben Stein: Everything You Wanted to Know About the Credit Crisis But Were Afraid to Ask:

Here s one big part of the answer. First, the alert reader will notice that Ben Stein said many times that the amount of money at risk in the subprime meltdown was just not enough to sink an economy of this size. And I was right...to a point. The amount of subprime that defaulted was at most - after recovery in liquidation - about $250 billion. A huge sum but not enough to torpedo the US economy.

The crisis occurred (to greatly oversimplify) because the financial system allowed entities to place bets on whether or not those mortgages would ever be paid. You didn't have to own a mortgage to make the bets. These bets, called Credit Default Swaps, are complex. But in a nutshell, they allow someone to profit immensely - staggeringly - if large numbers of subprime mortgages are not paid off and go into default.

The profit can be wildly out of proportion to the real amount of defaults, because speculators can push down the price of instruments tied to the subprime mortgages far beyond what the real rates of loss have been. As I said, the profits here can be beyond imagining. (In fact, they can be so large that one might well wonder if the whole subprime fiasco was not set up just to allow speculators to profit wildly on its collapse...)

These Credit Default Swaps have been written (as insurance is written) as private contracts. There is nil government regulation of them. Who writes these policies? Banks. Investment banks. Insurance companies. They now owe the buyers of these Credit Default Swaps on junk mortgage debt trillions of dollars. It is this liability that is the bottomless pit of liability for the financial institutions of America.

Because these giant financial companies never dreamed that the subprime mortgage securities could fall as far as they did, they did not enter a potential liability for these CDS policies anywhere near their true liability - which again, is virtually bottomless. They do not have a countervailing asset to pay off the liability.

This is what your humble servant, moi, missed. This is what all of the big investment banks and banks and insurance companies missed. This is what the federal government totally and utterly missed. This is what the truly brilliant speculators in these instruments did not miss. They could insure a liability they could also create and control. It is as if they could insure a Cadillac for its value upon theft - but they could control what the value the insurer had to pay off was. The insurer thought it might be fifty thousand dollars - but it was manipulated into being two million.

This is the whirlpool sucking down finance.

The Credit 'Crisis' - September 26, 2008 - The New York Sun. The Sun editorial board gives us another reason to miss them already:

Our friends at the New York Post set out this week to document the baleful effects of the credit crisis on ordinary New York businesses, attempting to make the case for the need for speedy federal passage of the Paulson plan. "Scores of small-business owners are struggling to get tightfisted banks to dole out loans for much-needed expansion plans," the Post reported.

The Post found two cases: "the owners of Five Point Fitness were given the runaround by their skittish bank for months -- and eventually had to borrow $175,000 from well-heeled clients." And "Kenny Lewis, 39, who owns a Subway sandwich-shop franchise in Queens. He applied for a $25,000 Small Business Administration loan and was told he'd get an answer in seven business days." Reports the Post: "He is now considering borrowing from private investors, saying 'they believe in what I'm doing.'"

Forgive us, but this strikes us as something less than a crisis. Neither the sandwich shop nor the gym have closed. Both are turning to private investors rather than banks. What, exactly, is wrong with that? Truth is, there is a vast amount of private capital waiting on the sidelines for opportunities to invest. The Investment Company Institute reports that, for the week ended Wednesday, September 24, there were $3.398 trillion in money market mutual fund assets -- enough to make that $700 billion Paulson plan look like small change....

If the politicians can't agree on a bailout plan, that may be for the best. One possibility that hasn't been adequately appreciated is that the stock market is poised for a rally anyway. If it happens without the "bailout," Americans will understand that economic growth doesn't require the government buying or seizing lots of assets. If it happens after the bailout, Americans may fall into the post hoc ergo propter hoc fallacy and get the false impression that the bailout was the cause of the rally.

The Corner on National Review Online: Mark Steyn: Burke's law:

One of my problems with the "bailout" is the way it's presented not as an emergency measure to correct the stupidity of previous political interference but as evidence of the flawed nature of the market, and thus a justification for more must-pass "emergency" measures ahead. Exhibit A - President Sarkozy rejoicing in the end of "Anglo-American capitalism":

The idea of an all-powerful market without any rules and any political intervention is mad. Self-regulation is finished. Laissez faire is finished. The all-powerful market that is always right is finished.

As a general proposition, when told by unanimous elites that a particular course of action is urgent and necessary to avoid disaster, there's a lot to be said for going fishing. If the entire global economy is so vulnerable that only the stalwart action of Barney Frank stands between it and ten years of soup kitchens, can it, in fact, be saved? Or look at it the other way round: Given any reasonable estimate of the number of headless chickens running around, was the five per cent fall in Asian markets and seven per cent "plummet" on the Dow in reaction to the House vote really the catastrophe some of my pals round here seem to think it was? If fear of seven per cent falls is enough to justify massive unprecedented government intrusion into the private sector, we might as well cut to the chase and go for the big Soviet command economy.

The Corner on National Review Online: Mark Levin: Thank you, House Republicans:

Also, count me among those few here who want to thank the House Republicans for taking a bold stand against what had been a stampede on a scale I have never before witnessed on matters of huge consequence. Conservatism is more than a quaint belief-system to be embraced and debated over donuts at Starbucks. It is more than a list of talking points. It is the foundation of the civil society. The liberal uses crises, real or manufactured, to expand the power of government at the expense of the individual and private property. He has spent, in earnest, 70 years evading the Constitution's limits on governmental power. If conservatives don't stand up to this, who will? If they don't offer serious alternatives that address the current circumstances AND defend the founding principles, who will? The House Republicans have done both. And I, for one, thank them.

Incidentally, if you want to buy a home or car today you can. And if your credit is decent, you can get loans at a good rate. Last week we were told that if a deal was not struck by last Friday, our economy would collapse. It has not. That is not to say the evidence of economic troubles or worse should be ignored. It is to say that now is a time for reasoned decisions based on tried and true principles, not for abandoning them. I notice that the socialist, who, for the last 30 years, has insisted that private institutions make risky loans based on non-economic factors, still has not abandoned his policies. Socialism does not work. We shouldn't support more of it.

Republican Study Committee letter opposing bailouts from September 17:

We write to express our deep concerns over the increasing propensity, size, and frequency of government interventions to prop up failing private sector companies. These bailouts have set a dangerous and urnmistakable precedent for the federal government both to be looked to and indeed relied upon to save private sector companies from the consequences of their poor economic decisions....

It is evident that no one wants to be the one who says no to a fiscal rescue when there is so much at stake. But the reality is that actions like federal bailouts taken to delay short-term financial pain often end up producing long-term damage to our entire economy. One need only look to Japan and the banking crisis that led to its 'Lost Decade' of recession and stagnant economic growth from which it has still failed to recover. The IMF has called those economic problems "a failure to deal proactively with the impact of the collapse in asset prices" that has led to real GDP growth only averaging 1 percent a year over the past decade.

Republican Study Committee: Chairman Hensarling's Statement on the Economy and Administration Plan for Financial Markets: Initial reaction to the Paulson plan's release on September 19.

Human Events: Republican Study Committee Releases Alternative to Bailout Proposal: Suspend "Mark to Market," stabilize the dollar, schedule Freddie Mac and Fannie Mae for privatization, two-year suspension of capital gains taxes, followed by indexing for inflation.

Hot Air: Party like it's 1999 redux: The New York Times predicted Fannie Mae failure

Frank's fingerprints are all over the financial fiasco - The Boston Globe

Brian Wesbury: Psychology and the Economy (via Club for Growth):

Never in history has a drop in consumer confidence caused a recession. But that does not mean there won't be a first time. It could happen in the next few months and we would expect to see some very negative data on economic activity. But this would be followed by an offsetting increase in activity following the psychological slowdown.

Productivity is still booming, and so are exports, the Fed is exceedingly accommodative and tax rates have not been hiked. Moreover, oil prices are below $100 per barrel. Finally, all it would take to fix financial market problems today is a temporary suspension of mark-to-market accounting for a targeted set of illiquid assets.

In other words, any economic problems that the US faces in the next few months or quarters is temporary. Financial markets have priced in Armageddon, and as a result still present one of the greatest buying opportunities of our lifetimes.

Ross Putin: Rule change hypocrisy:

As I noted in a prior posting, financial stocks fell more than 8% on Monday, with short-selling not permitted. Who do they blame for that, with the evil speculating short-sellers out of the picture? So they impeded the free market with no proof of justification.

On the other hand, the price of mortgage securities has been plummeting for months primarily because of a recently imposed rule change called "mark-to-market", which basically forces banks to say that their mortgage security portfolios are worth much less than an objective analysis absent those rules would show them to be. That reduction in "capital" forced banks to try to sell these things and get cash on their balance sheets. But there's no progress in getting the destructive rule changed, even temporarily for a very narrow range of assets....

The short-selling rule change combined with the lack of change in the mark-to-market rule demonstrates that what Congress wants even more than to "save the economy" is to increase their own power and to attack the most fundamental aspects of capitalism and free markets. I only hope the House Republicans can move the debate away from the Paulson/Barney Frank plan.

MORE:

Jeffrey Miron: Bankruptcy, not bailout, is the right answer. The Harvard lecturer in economics writes:

The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources....

The bailout has more problems. The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients.

Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take. The bailout will open the door to further federal meddling in financial markets.

So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.

Spengler: Asia Times: Truth, lies, and ticker tape

If American banks are permitted to fail, and their operations maintained intact by the FDIC, new investors can restart operations with a clean slate.

What is so awful about wiping out the home price bubble of the past 10 years? Suppose home prices were to plunge by half (which is where homes in foreclosure clear the market in California or Florida)? Young people would find it easier to start families and old people would work longer before retiring.