September 30, 2008 7:34 PM
Rigid mark-to-market accounting rules may have triggered the current financial crisis by artificially undervaluing mortgages and securities (making financial institutions appear insolvent). Even the very government officials who have advocated those rules now hint that they will disregard them in valuing the government's own mortgages, in administering any bailout! (This inconsistency undermines arguments for the bailout).
The SEC today made federal accounting rules a bit less rigid by allowing methods other than mark-to-market accounting in appropriate conditions. Thus, when mortgages have not defaulted, financial institutions need no longer treat them as worthless, even when no active market exists for the security based on those mortgages.
September 30, 2008 11:58 AM
The People have spoken. They have picked the Market over the Government to be the chooser of winners and losers.
Here are the Market's choices for winners:
1. Those that live in their homes, versus those that purchased houses to be flipped (third letter).
2. Homeowners that purchased a house that they could afford with a 30-year fixed, versus the over-extended with an adjustable rate.
3. Small local banks that didn't make ARM loans with no money down, versus big ones with mortgage-backed securities.
4. Those that saved their money, versus those betting on the stock market.
5. Those who pay for their cars with cash, versus those who finance them.
6. Those who pay for their expenses with cash, versus those who run up credit card debt.
7. Those who save money for their kids' college funds, versus those who rely on loans.
8. Those who chose preferred stock, versus owners of common stock.
9. Those industries that are needed by and contribute to today's economy, versus those that rely on subsidies voted for them by politicians.
10. In the global market—the Market will choose economies that have less debt and low inflation, versus big spending governments with easy monetary policy.
In general, the Market will choose the prudent. Who would have the Government picked as winners? The Market's choices for losers. The Bailout would have picked all of the losers above.
Risk is not immoral: everyone should be able to invest as they choose, but they do so at their own risk.
September 29, 2008 6:19 PM
There are all sorts of people today who normally talk about free markets but who have got themselves into a tizzy over the failed bailout. We need to get one thing straight - the bailout was the wrong answer to the wrong question. To begin with, the plan was merely postponing the inevitable, as a letter in the Wall Street Journal pointed out this morning:
The lesson of past financial inflection points is that we must let the markets reallocate capital from less efficient to more efficient uses. The sad fact is that we need to go through a brutal process of resizing down our financial and real-estate industries. Actions to try to recapitalize doomed financial companies only postpone the day of reckoning, which will make matters worse as the Japanese learned in the 1990s.
Secondly, we have to ask how to protect future viable assets and investments, not just what we should do about past failed assets and investments. The bailout plan is exactly the wrong approach. It puts in them in jeopardy because not only does it tread down the policy road that led to the Great Depression, as Martin Hutchinson powerfully argues, but because real capitalism provides strict disciplines that actually provide better protection than government regulation. We will not succeed in protecting our children from a future financial meltdown if we merely put in place the exact parameters for it to happen again.
September 29, 2008 6:04 PM
The stunning defeat of the Hank Paulson's socialism-for-Wall Street bailout on Monday has just made planks of a pro-free market alternative much more viable. As Open Market has noted before, The Republican Study Comittee, a caucus of pro-market members of the GOP Congress, has presented such a plan that would be much more effective at stopping the contagion than the Paulson bailout, and many of its provisions would not cost taxpayers a dime.
The RSC plan is chock-full of measures to remove barriers to economic growth and market-distorting subsidies. It would suspend capital gains taxes to put trillions of dollars of capital in the economy, and set Fannie Mae and Freddie Mac, which as CEI has documented were at the root of this crisis, on the road to full privatization.
Most importantly for the crisis at hand, the RSC plan would make regulatory agencies suspend the mark-to-market accounting rules that a range of experts agree are spreading the contagion by forcing solvent banks' to "write down" their assets, based on the last fire sale of a highly leveraged bank. As Gary Gorton, finance professor at Yale and member of the National Bureau of Economic Research has written, "With no liquidity and no market prices, the accounting practice of 'marking-to-market' became highly problematic and resulted in massive write-downs based on fire-sale prices and estimates."
September 29, 2008 3:23 PM
Oh, Happy Day! And it certainly is for all those who value freedom, responsibility and the true free market in which individuals are free to profit from their risks on the condition that they don't stick the rest of us with their losses.
It's not hyperbole to say the Republican and Democratic backbenchers who defied both parties' leadership to defeat this $700 billion package of Wall Street socialism literally saved America. Whatever their reasons, this defeat (or rather victory for freedom), means that America is much less likely to turn into France, Venezuela, or the old Soviet Union, as this bailout/nationalization package would have set us on the road to becoming.
Several great speeches on the Right and Left were given. Democrats Brad Sherman of California and Earl Blumenauer of Oregon gave powerful speeches against corporate giveaways. And conservative leaders of the Republican Study Committee -- such as Jeb Hensarling, Jeff Flake, Mike Pence, and of course Ron Paul -- spoke about how government intervention was largely the cause of this predicament, but the bailout would doom arguments for the free market form here on out. The idea of the government making this kind of outlay to high-flying risk takers just didn't jibe with members, and certainly not with the American people.
September 29, 2008 2:47 PM
Unfettered greed is the suspect many point at to explain the current economic crisis. To some extent, they are right, but it isn't irrational greed on the part of bank managers or fat cat CEOs. It is the unwieldy bank regulations that forced the entire industry to walk the proverbial plank and then blame it for drowning.
Critics have alternately claimed that over-regulation and under-regulation are the causes for the current crisis. I believe one specific regulation, the Community Reinvestment Act (CRA), should shoulder a lot of the blame for creating an environment where a lending institution's short-term survival hinged on it making the decisions that in the long-term would likely cause its demise.
As I noted in my paper The Community Reinvestment Act's Harmful Legacy, one of the effects of the CRA was the creation of a weapon that has been effectively utilized to extort money from lenders. When lending institutions wish to open a new branch, expand, or merge, they must apply for permission from one of the four governing bodies (Federal Reserve, Office of Comptroller of the Currency, Federal Deposit Insurance Corporation, and Office of Thrift Supervision). Their request can be postponed or outright denied if any community group files a CRA protest. Lending institutions can of course fight these protests, but CRA investigations can take months and cost large sums of money.
September 29, 2008 2:19 PM
Though the bill may have been defeated for the wrong reasons—like the lack of freebies, giveaways, and handouts that many on the left had hoped for—the defeat of the bailout bill in the House has brought stocks out of their decent. The Dow Jones is now climbing.
But how can this be? How could a bill that was designed to save our economy, our country, and the world be the cause of the Dow's drop today? Easy, the bill was introducing such incredible uncertainty into the market that investors were panicking.
It could also be that Wall Street—despite the recent bank closings—is still smarter than Washington. The reactions of investors suggests they realize the bill may have done more harm than good.
For more on why a defeated bailout bill is a very good thing and why the world doesn't need saving, read John Berlau in today's American Spectator.
Stay tuned to OpenMarket for John Berlau's reaction to the bailout bill's defeat. Also, check out our Bailout Watch page at CEI.org.
September 29, 2008 2:13 PM
The House of Representatives just voted down the $700 billion corporate finance bailout, despite earlier urging from President Bush to push the measure through. Look for in depth analysis from our very own John Berlau and the rest of the policy team as the day progresses. Read CEI's roundup of the continuing finance crisis (and sign up for email updates) here.
NEW: John Berlau responds (and speaks!) in reaction to today's vote. Updated post and audio clip here.
Bailout Bill Just Got Worse, But Congress May Approve It Without Reading It, Based on Misleading ClaimsSeptember 29, 2008 10:53 AM
The bailout bill has been larded up with additional welfare that will increase its cost, but the House will likely approve it today without even reading the bill, which had already expanded to more than 100 pages last night. Worse, some conservative lawmakers may vote for it based on the misleading claim that it contains no welfare for delinquent and defaulting borrowers who are now facing the consequences of years of living beyond their means.
The Associated Press, which didn't bother to read the bill before reporting on it, claimed today that "not in the bill" is "help for troubled homeowners." (See Martin Crutsinger, Associated Press, “Rescue Bill Includes More Oversight, Insurance Option," Washington Examiner, Sept. 29, 2008, at page 14). In reality, the bill includes provisions that allow some irresponsible borrowers to get not only their interest but also their principal reduced, and that expand a government program that helps defaulting borrowers cut their mortgage payments. But the Washington Examiner, which wisely opposed larding up the bailout bill, has today reluctantly come out in favor of the bailout as a necessary evil, after reporting on page 1 that the "$700B bill contains no" welfare for defaulting borrowers. (The Examiner earlier chronicled how government handouts and regulations helped spawn the mortgage crisis).
September 29, 2008 10:42 AM
Andy McCarthy on National Review's Corner points out,
The scheme "[a]llows the government to purchase troubled assets from pension plans, local governments, and small banks that serve low- and middle-income families."So in addition to rewarding irresponsible lenders and borrowers, we taxpayers are now to be "protected" by buying the toxic debt of states, cities and municipalities. It's one thing to throw a life-line to the credit industry; local governments, by contrast, have the ability to cut spending drastically or raise taxes if their inhabitants want government services.
Did Andy also notice Section 112 in Sunday's draft (emphasis mine) ?: "To the extent that such foreign financial authorities or banks hold troubled assets as a result of extending finances to financial institutions that have failed or defaulted on such financing, such assets qualify for purchase under Section 101."
Just wait until the voters catch these particulars. They'll take their revenge on whoever signs this saying, "Throw the bums out!"