“Well, if you’re so opposed to a bailout of Wall Street, what would you do?” I get this question all the time from advocates of the proposed $700 billion Wall Street bailout here inside the Beltway. In the nation’s capital, this is what passes for a plausible “defense” of bad policy proposed during times of crisis. “We must do something. Here’s something. Do it. Now!”
If I had any confidence in the ability of the political process to produce a rational, bold response, my answer would be: “I would do plenty.” Start by unwinding the many government mistakes that created the housing bubble, repealing the various laws and regulations specifically designed to put people into homes that they could not afford. I would scrap the Community Reinvestment Act, break up Fannie and Freddie, and put the pieces back in the private sector. If “liquidity” and the availability of capital is the immediate problem, I would also repeal the tax on capital gains and other tax provisions that punish savings and capital accumulation. The Flat Tax does all of this in one fell swoop. And, finally, I would repeal the various distortions in corporate accounting hurriedly drafted during previous legislative panics, starting with Sarbanes-Oxley.
An even bigger, but essential, legislative lift would take a serious look at the destructive role the Federal Reserve has played in this financial crisis. Rep. Ron Paul, Texas Republican, was arguing this before it was cool. But it is clear the Fed has become more social engineer than guardian of sound money. Easy credit and low interest rates, intended to ease shocks to the economy, only distorted relative prices and fed the housing bubble.
And then I would let the market work. The policy mistakes of the last dozen years cannot be corrected without some pain. The only question is whose pain? Markets don’t work unless mistakes are allowed to be corrected, and losses incurred. Bad actors on Wall Street, or Main Street, should suffer the financial losses produced by their bad bets and carelessness.
Such losses, just like profits in good times, are vital to the functioning of markets. As BB&T Chairman John Allison put it in a letter to Congress this week: “Corrections are not all bad. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom.”
I doubt that politics could produce such bold action this year, with a lame duck in the White House and a bitter election fight that will determine the next president and political control of Congress. One big roadblock to change would be the necessity for sitting committee chairmen to acknowledge their own mistakes and repeal their favored programs.
Instead, the American people are asked to fund the largest bailout of Wall Street in American history. On Monday, the House rejected Treasury Secretary Henry Paulson’s original, awful proposal, a vote driven by grass-roots outrage. As I write, another attempt is being drafted, no doubt being draped like a Christmas tree with enough handouts and pork to buy the votes needed for passage.
Despite these changes, the “new” plan likely will retain the character of the original. The proposed solution to a problem created by easy money and easy mortgages is $700 billion in borrowed (or created) money to buy dodgy, mortgage-backed securities from failing Wall Street firms, the correct price of which Wall Street’s best minds say they cannot figure out. It socializes a big piece of our private financial system, and gives the U.S. Treasury secretary full discretion to dictate winners and losers in this reshuffling of assets. Think I’m exaggerating? The bailout proposal offered by Mr. Paulson stated: “Decisions by the secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”
A few stalwart members of Congress have stood up to this plan to socialize major Wall Street investment banks. Reps. Mike Pence of Indiana and Jeb Hensarling of Texas and Sens. Jim DeMint of South Carolina, Jim Bunning of Kentucky and Richard Shelby of Alabama, all Republicans, have bravely stood up and said “no” to the proposed bailout. They are recruiting others. So far, Democrats are refusing to pass the bill without House Republican complicity. That alone should tell us all the essence of the bill.
Politicians from both parties would be wise to listen to folks on Main Street on this one. If you want to know what’s on their minds, go to FreedomWorks’ new petition at NoWallStreetBailout.com. Margaret from Pennsylvania writes: “Bad investments should not be bailed out. Investments go up and investments go down, and that’s just the way it is. If these investments are rescued now, no one is going to learn anything and we’ll just be doing this again in 10 years except it will be much worse.” Jason in Connecticut is blunter: “Socializing Wall Street’s financial crisis is un-American. Simply put: Any politician that votes “yes” for this bailout will receive a vote of “no” from me when they seek re-election.”
Matt Kibbe is president and chief executive officer of FreedomWorks.org