Amidst the collapsing scenery of Wall Street, we seem to have lost sight of just about everything.
Secretary Paulson's now-infamous original bailout proposal is actually only three pages long, free of financial and economic jargon (with the possible exception of the possibly ambiguous “Mortgage-Related Assets”), and freely available online at a number of sources. But for those still not inclined, Sections 6 and 10 contain the money shots: “The Secretary's authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time,” and “[The subsection of the US Code concerning the Public Debt] is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.” Although the proposal is mundane, there is something valuable to be learned by reading the relevant US Code itself; observe the many incremental amendments made over the past quarter-century, each a stark reminder of the government's wholesale willingness to increase its own line of credit.
Socialism? In my United States? Surely not. (This is not entirely sarcasm; in a situation like this, successful democratic socialism would have at least managed to nationalize the profits, too, rather than just the risks.) But if we excoriate the bailout, we should probably offer a proper defense, too.
The much-discussed $700 billion figure is itself an arbitrary and manufactured figure; all the remaining sub-prime mortgage in the country still left uncovered post-Fannie and post-Freddie are collectively only worth half a trillion dollars, so unless Paulson plans to expand to beyond the sphere of mortgages, the figure is also necessarily too high. The bailout is also not an ordinary cash outlay, but rather what might be considered a very large and very poor investment funded by the public debt, and depending on the determined value of the mortgages, the taxpayers will likely receive some return for their investment. In fact, depending on the valuation, a slim chance remains that the government might ultimately realize a profit. The deepest argument in favor of some kind of intervention, though, is that the bailout may simply be unavoidable to avoid catastrophe.
But not only is this not necessarily true, the bailout in its current iteration is rather just reinforcing the existing problem by presenting a terrible moral hazard. In bailing out the bankers, we're giving them an incentive to continue—and more importantly, we're not offering them an incentive to stop—their cavalier lending, positively ensuring future misbehavior. Just as important as the fact that millions of Americans are caught up in web of bank deceit and their own stupidity is the fact that millions of Americans are not; millions sought to live within their means, took out responsible loans, are in the process of paying them back. Why should we punish the prudent and responsible by rewarding the disingenuous and irresponsible, at the cost of the former? It seems that we self-evidently shouldn't. And what about inflation? What about the debt? What about corruption?
The bailout will pass through in some form—with some oversight and strict limits on executive pay for rescued lenders—and hopefully, we've at least learned that if a corporation becomes so large that our national interest is significantly aligned with its own, it has become too large. Wall Street is just lucky it didn't ask me for my opinion; cold fronts in Hell aside, Washington Post columnist Charles Krauthammer seems to share my sentiments. “Capping executive pay is piffle,” he wrote in a Friday op-ed, “What we need are a few exemplary hangings.”
Well put. Burn, baby, burn, I say; sometimes chemotherapy is the only choice.
