I'm sick and tired of hearing people -- on the left and the right -- say stupid things about the financial crisis.
First, let's get this clear. This is a problem caused by aggressive social engineering by the federal government, from Carter to Clinton. However, at this point the funds that have been poisoned by shady lending practices—tranching and re-tranching of MBS and CDOs until nearly everything carried an AAA rating—have been come so prolific that liquidity is essentially gone. We were <--this--> close to having a freeze on commercial paper last week. We almost had a $200Bn run on money market accounts, one of the most stable places for capital in our entire financial system. This is not a “small thing”. This is not the S&L crisis; this is potentially much, much worse.
The bad thing about this situation, this crisis, is that it is complex—so complex that it is not easily condensed into modern news story sound bites, so that most of the people in this nation have no clue whats going on, other than a vague notion of “financial crisis". Most don't "get" what those graphs above imply.
Namely, this -- commercial paper is the grease that makes our economic wheels spin. It's what allows you to use credit cards, what enables companies to expand, to buy new assets, and to enter new income streams. It is to a major corporation what a home loan is to an individual -- a way to reach financial goals that would otherwise be completely impossible to attain. And it was getting so expensive, and so scarce, that it nearly collapsed. That would be, as they say, "bad".
Secondly, please people -- don’t bash the Paulson-Bernanke plan yet. For one, the outline proposed pre-Democratic meddling is not a bailout. It is an extension of capital in exchange for marked-to-market poisoned assets, most of which worthless and legally nonviable under current accounting rules. This allows banks to get the junk off of their balance sheets. It’s like a get-out-of-jail-for-billions-card. This is not a free pass. Banks with a lot of residential mortgage backed securities (RMBSs) and collateralized debt obligations (CDOs) are going to lose a ton of money—on top of what they’ve already swallowed. This plan will pay them pennies on the dollar for assets that aren't really worthless...they're just not viable under the present financial situation and accounting rules.
For two, it stands to make the government quite a bit of money as the currently near-worthless BBB or lower rated assets will be sorted out, re-rated and sold back to the private sector, once federal intervention increases the transparencies of these securities. This is not a permanent Finance Czar, nor is it a $700Bn bailout—yet (we’ll see what Reid et al in the senate tack on to the bill). Please note that the $700 billion is a proposed spending cap, not a mandate. Additionally, the program is currently timelined at a two year horizon.
And, to answer the populists, of course people on Wall Street were complicit. These securities didn’t trade themselves, and everyone was glad to play along with the bogus rating system as long as it made them money. But make no mistake—this crisis is government caused and government reared. The Bush Administration tried no less than seventeen times in 2008 alone to fix this by, namely by increasing transparency and regulatory oversight, but Chris Dodd and others busily shoving taxpayer money into their pockets (or campaign coffers) blocked them at every turn. Aside from massive corruption, they did so because this plays right into the “capitalism is a failed system” playbook of liberals. If they can spin this as a situation that capitalism is inherently prone to suffer from, you can kiss a lot of our free-market principles good-bye. Prepare for nationalized everything, as clearly "irrational exuberance" must yield to "older and wiser heads".
Which brings up another thing that really irritates me -- on September 17, Harry Reid said this:
No one knows what to do...We are in new territory, this is a different game. [Neither Federal Reserve Chairman Ben Bernanke nor Treasury Secretary Henry Paulson] know what to do but they are trying to come up with ideas."Well, someone must have got to him (and quick!) because he's definitely singing a different tune today:
"The Bush Administration has called on Congress to rubber stamp its bailout legislation without serious debate or efforts to improve it. That will not happen," said Reid.Who the heck are you to criticize if just six days ago you were wringing your hands, meekly admitting that you hadn't the foggiest what to do in a situation like this?
The reason for his change of heart? Undoubtedly he got some nasty phone calls from corporate interests and lobbyists...which I imagine went something like this:
Listen you dolt, you're blowing it, blowing it! This is a chance for us to do something...[the perennial liberal mantra, of course] and get some power besides! Get back out there and do your job -- representing those who pay you best.
I think the plan, as outlined thus far, is a good one. Here's to hoping they get it passed before Reid and his cronies can stick so much socialism into it (up for grabs thus far, partial nationalization of all affected banks, government mandated CEO salaries, and federal judges waiving mortgage payments) that it no longer does anything worthwhile -- or before they drop a half trillion of their own in an attempt to throw debased dollars at the problem.