Trillion Dollar Bailout: No Ideologues in Financial Crisis?

After following the rapidly developing news of the financial crisis and the efforts of the Fed and other U.S. agencies to prevent the onset of Great Depression Part Deux, I still honestly don’t know what to think.  My inclination, however, remains skeptical.   Jim Henley‘s had the best line on this so far: “Wouldn’t it save administrative costs if I just started giving my money to random rich people?”

Certainly, Fed chair Benjamin Bernanke and Treasury Secretary Hank Paulson are smarter about these issues than I am.  And it’s true that the mere news of a massive bailout bucked up stock markets around the world, creating the largest single day surge in the Dow and even bolstering a Russian market that was imploding on its own merits.

But a what cost?

Bernanke says, “There are no atheists in foxholes and no ideologues in financial crises.” But if there’s ever a time to hold strong to fundamental principles, it would seem that this would be it.  We’re setting precedents that will govern the behavior of the international business community for decades to come.  Do we really want to signal that risks are public and rewards are private?

For that matter, do we really want such fundamental decisions being made by obscure, unaccountable men like Bernanke, Paulson, and SEC chair Chris Cox?  Shouldn’t Congress and the president be more than bit players?

At a practical level, Amity Shlaes is right when she notes that, “The stock market crash of October 1929 and the Great Depression were not the same thing.”  And a New Deal II could just as easily lead to Great Depression II as letting creative destruction do its thing.

FILED UNDER: General, , , , , ,
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Bithead says:

    But a what cost?

    Perhaps this question should be asked within the context of what it would cost if we did NOT.

    A comparison of the two possibilities seems the only fair way to examine the issue.

  2. od says:

    It sure makes most people skeptical about the “free market”. Lots of jokes going around right now about free market meaning providing a welfare service for the rich while letting the poor starve. You can argue the details with people, but for the most part you can see how cynical people are becoming about it – there’s a sense that there’s a very different set of rules for the rich.

  3. ixmil says:

    Of course the primary line of rhetoric is in regard to deregulation at-large. However, I cannot help but wonder: if these institutions are too big to allow to fail, then should we have approved the financial merger mania of the past two decades? Is the industry over-consolidated, thus leading to the “too big to fail” fallacy?

  4. ixmil says:

    I did not mean to use the word “fallacy” at the end of that post. I meant “predicament.” Sorry about that….

  5. Bithead says:

    Of course the primary line of rhetoric is in regard to deregulation at-large. However, I cannot help but wonder: if these institutions are too big to allow to fail, then should we have approved the financial merger mania of the past two decades? Is the industry over-consolidated, thus leading to the “too big to fail” fallacy?

    That the question is even asked should put the squash to the argument that this has anything at all to do with a free market. If the market was free, such questions wouldn’t even be asked.

  6. Rick DeMent says:

    …but for the most part you can see how cynical people are becoming about it [free market]…

    I’m not cynical, I’m militant. The entire concept of the “free market” is a fiction and has been a fiction ever since the modern corporation was midwifed from the notion of the corporation mentioned in the US constitution.

    There is not, nor has there eve been anything like the libertarian notion of a free market (except for the parking lot of a Grateful Dead concert in the 70’s).

    You simply can’t have an economy where you don’t do anything. Moving paper from one place to another and taking a cut has brought down empires before and it will do the same to the US. And shining each others shoes won’t do it either.

    The complete vapidness of free market, trickle down, borrow and spend, consume at all costs ideology is astonishing and we are in the last days of US economic hegemony. Smoke ’em while you got em, our system of government is not equipped to deal with large complex problems that require sacrifice on the part of the electorate.

    IMHO…

  7. Dave Schuler says:

    What must be kept in mind is that government inaction is not an option. It’s a political necessity. Any government, Democratic or Republican, would move to intervene in the circumstances that face us now.

    It’s reasonable to ask that government act prudently; it’s not reasonable to ask that government not act at all.

    The responsible critics of the current plan have urged more incremental measures. The incremental measures assayed to date have been ineffective and that’s clearly what motivated the latest proposal.

    I don’t think that the politics of this is at all clear-cut. There were at least three major precipitating factors in the crisis: the money policy of the Fed, the GSE’s overcommitment to the subprime mortgage market, and the SEC’s willingness to ease capitalization requirements. Neither party showed any particular zeal in changing any of those and Wall Street behaved much as you would expect it to under the circumstances.

  8. Floyd says:

    GEEEEESSHH!! No exaggeration in that headline?!?!
    AND, I’ll bet you can “prove” it![lol]

    “Consider these facts……”

  9. Allen says:

    How did we get here? All of a sudden we are facing Armageddon in our financial systems, one day they tell us our economy is fundamentally sound and the next day we’re here. King Paulson is asking for the power to make decisions that would be unchecked by Congress, the ability to buy whatever he wants. He is now saying foreign banks should be able to use this program. American tax money we don’t have. If this really affects global financial systems, why isn’t the rest of the world putting up their balance sheets? Why does American continue trying to do everything by it self? Here we go again, what does this sound like? This sounds like 2001 and 2002 all over again, a time when the Congress gave the President broad powers to fight the war on terrorism, powers that they couldn’t get back. WE SHOULD BE VERY CAREFUL! One of the reasons our government has been free of major problems is the checks and balances designed to ensure major crises are well thought out. Look at the major events of the 20th century, in World War I, President Wilson realized our nation couldn’t avoid the war but he made sure that he got the American people behind him, convinced them they should sacrifice for the greater good. In World War II we had the same thing, after 9/11 the president told the people they shouldn’t change their way of life, he told them they should go shopping. He told t they were in a Global War on Terrorism (GWOT)but he didn’t ask them to sacrifice. Did he think he was doing them a favor? Americans are very resilient, they understand when they need to sacrifice, and all you have to do is ask. However if you continue to tell them it is not their problem they will believe it. The United States has a population of over 300 million, and yet only about 3 % of the population has participated in the GWOT. Why? Because you told them to go shopping and now they believe that they should. And now not enough Americans are willing to sacrifice for the greater good, they are worried about paying their mortgages, and providing for their families. Under this administration, we continue to find our nation in crises, we continue reacting instead of acting, and now they are asking for more unchecked powers, BE VERY CAREFUL.

  10. angellight says:

    I am writing on the $700 billion dollar bail out Sec. Paulson wants Congress to Quickly pass, again without any regulation or oversight! It seems to me that corporations are trying to save their own hides on the backs of the American people. We cannot allow this to happen to us again and again — corporations first, people never. And there is the fact that no one knows what loans belong to who, and they may never know. How can that be? It sounds fishy and criminal. We cannot just go rushing into this maze in haste. We must carefully and thoughtfully try to find our way out that will benefit the people this time and not just the corporations, who are only trying to save their wealth, their stocks, their homes and cars, their Country Club First, way of life. Trickle down economics cannot work because it is against the laws of nature. In nature we start/build from the bottom up, etc. a plant, a tree, a child. And when we build homes or cars we start from the bottom and expand up or outwards and that is how we should model our business dealings. We cannot work against nature’s wisdom and intelligence by hoping things will trickle down. It is just not sensible. We have an intelligent design through nature and we should use her model not man’s greed. It is very hard for me to trust the people who got us into this mess to somehow now be able to get us out of this mess. That too does not make sense!

  11. anjin-san says:

    How did we get here?

    Do you know who the president is?

  12. Scott Swank says:

    Paul Krugman has a simple, better plan. Spend $700 billion (or whatever amount) to buy stock in banks. That way the banks get capital and the public gets stock to sell later when the crisis has passed. And the public does not buy toxic assets.

  13. Nikolay says:

    creating the largest single day surge in the Dow and even bolstering a Russian market that was imploding on its own merits.

    Russian government dumped 100 billions of dollars on the market, and has some 600 more to spare in the “reserve fund”. This might have more to do with the reversal of the situation than American politics.

  14. just me says:

    How did we get here?

    Do you know who the president is?

    This has to be the dumbest thing said in this discussion.

    Believe it or not everything isn’t Bush’s fault and the problems that led to the current crisis didn’t start 8 years ago, they started a good 15 to 20 years ago.

    I do think one concern I have is that a big part of the problem was that many of these companies took huge risks, and if they get a bail out from the US taxpayer, without any strings attached, will that encourage risk taking?

    I am not keen on bailing out companies that fail-I think it was a mistake with the airlines and I think it is a mistake now but in the end it may be less of a mistake in the big picture than letting them fail-I don’t think this crisis comes with easy answers, but whatever the answer is it should come with accountability.

  15. Floyd says:

    Anjin-san;
    You mean President Scapegoat?? The man responsible for everything from bad weather to bad habits? Are you lazy,smoke or drink too much?
    beat your wife? weather gotcha down?? It’s that damned President Scapegoat’s fault!
    No worries we got the cure! President Perfect is coming to save the day! Mr.Bluebird on his shoulder!
    Here comes sunshiny parades,the loss of unwanted pounds, and the kids won’t talk back no more!
    ….
    “”May I have your attention, please?
    Attention, please.
    I can deal with this trouble, friends,
    with the wave of my hand, this very hand
    Please observe me, if you will
    I’m President Perfect
    and I’m here to organize a Utopia Boys Band!””

  16. Anderson says:

    No bailout without some effort to find out what checks & balances could have blunted the severity of the crisis, and implementing an attempt at those.

    The key here is a graf that Josh Marshall quotes from the WSJ:

    House Republican staffers met with roughly 15 lobbyists Friday afternoon, whose message to lawmakers was clear: Don’t load the legislation up with provisions not directly related to the crisis, or regulatory measures the industry has long opposed.

    If that’s the condition — $700 billion or more, with Wall Street setting the terms for how much it’s to be regulated — then let Wall Street solve its own goddamned problems, says me.

  17. Dave Schuler says:

    No bailout without some effort to find out what checks & balances could have blunted the severity of the crisis, and implementing an attempt at those.

    I think that cuts both ways, Anderson. Right now I’m seeing quite a few proposing regulations for regulations’ sake without any clear connection between what they’re advocating and present circumstances.

    As Brad DeLong noted in his excellent post on the subject of dealing with financial crises, this is not the time to punish the folks who got us into this mess, it’s the time to staunch the bleeding.

  18. anjin-san says:

    You mean President Scapegoat??

    I am being a bit sarcastic, so try not to have a stroke. But, I see that “The Buck Stops Anywhere But On This President’s Desk” crew is out in full force.

    It is interesting that the Bush Presidency has been an almost endless series of disasters. Was not like that under Clinton. Yes, one man can make a difference, especially if he is the most powerful one in the world.

  19. Anderson says:

    Right now I’m seeing quite a few proposing regulations for regulations’ sake without any clear connection between what they’re advocating and present circumstances.

    I think that’s a good point, which is why I called for “some effort to find out” what needs to be done.

    I’m unconvinced that Bernanke or Paulson, much less op-ed and blog writers, really & truly grasp what’s happened, the extent to which it was bad luck, and the extent to which it was preventable given sufficient regulation.

    Ironically, this puts me in some agreement with McCain — I think “a commission” is not a bad idea here. I’d prefer to see the leadersip coming from the Democrats … and give me a pony too, while you’re at it.

  20. DL says:

    The free market is for the rich?

    The FNMA debacle was because of garnishing favors for the poor and making several Democrats very rich in the process.

    The Barney Franks and Chris Dodds will be rewarded by leftist voter in the Northeast with their disasterous shenanagens while Bush and Mccain who warned them get the blame. What else is new in upsidedown America?

  21. sam says:

    At a practical level, Amity Shlaes is right when he she notes

  22. sam says:

    And a New Deal II could just as easily lead to Great Depression II as letting creative destruction do its thing.

    The problem is that we just don’t know what the scope of the destruction in “letting creative destruction do its thing” would be. Given this kind of uncertainty, I’m not sure that any government could have (would have) followed the admonition “Don’t do something, just stand there.”

  23. Bithead says:

    Do you know who the president is?

    Ah yes.
    Anyone up for yet another chorus of the Anjin-San pian to Democrats… “It’s all Bush’s fault”?

    Ironically, this puts me in some agreement with McCain — I think “a commission” is not a bad idea here. I’d prefer to see the leadersip coming from the Democrats … and give me a pony too, while you’re at it.

    SUch a gathering seems reasonable, but the effectiveness of such would seem to be dependant on who is in it.

  24. Floyd says:

    “”I am being a bit sarcastic, so try not to have a stroke””
    “”””””””””””””””””””””””””””””””””””””””””””””””””

    Am I to assume that you think I wasn’t??[grinz]
    …You can go ahead and have a stroke now![lol]

  25. James says:

    Do Republicans think that this $700 billion dollar giveaway at taxpayer expense without oversight or accounting, or any accompanying proposal to pay for it, is a good idea?

    Seriously, I am asking. Do you Republicans think this is a good idea?

  26. Floyd says:

    James;
    I’m not exactly a Republican, but I must respond to say that you have completely mischaracterized events, your motivation would only provide fodder for conjecture.

  27. James says:

    Do Republicans think that this $700 billion dollar giveaway purchase of worthless assets at taxpayer expense without oversight or accounting, or any accompanying proposal to pay for it, is a good idea?

    Seriously, I am asking. Do you Republicans think this is a good idea?

  28. Floyd says:

    I said “completely”…..

  29. James says:

    I haven’t mischaracterized a thing. Fool yourself all you want. Or is that the game, then?

    Do Republicans think that this $700 billion dollar giveaway purchase of worthless assets at taxpayer expense without oversight or accounting, or any accompanying proposal to pay for it, is a good idea?

    Seriously, I am asking. Do you Republicans think this is a good idea?

  30. Bithead says:

    Do Republicans think that this $700 billion dollar giveaway purchase of worthless assets at taxpayer expense without oversight or accounting, or any accompanying proposal to pay for it, is a good idea?

    Seriously, I am asking. Do you Republicans think this is a good idea?

    As a rule, no, but given the conditions et up by the left I don’t see a great deal of choice in the matter. Let me pass a little something along from Boortz that will help explaining my position by explaining how we got here.

    1. Almost all of the financial problems we see today are based on bad mortgage lending. That would be lending money to people to buy homes who didn’t qualify for a loan.

    2. The Democrats, under Clinton, strengthened a government-created monster called the “Community Reinvestment Act.” This law was then used by “activists” and “community organizers” (like Obama?) to coerce lending institutions to make these bad loans … millions of them.

    3. Now we see what happens when political “wisdom” supplants good loan underwriting. When private financial institutions are virtually forced to make loans to people with a bad credit and job history .. this is what you get. Enjoy it.

    Like every other time Government has touched something, it’s ruined it to the point where stepping in to pick up the mess was a requirement. Rail transportation, for example. More recently, air transporation. And so on.

    As I say, given the current sitrep, there’s really not much to be done. I say it would ahve been better had the government stayed the hell out of the loan biz, no matter how well intentioned the effort was.

    The problem isn’t the bailout, it’s what led to it.

  31. Floyd says:

    “”Fool yourself all you want””
    “”””””””””””””””””””””””””””””””””””””””””””””””””
    Thank you, I will! Until tonight I didn’t know I needed permission from those more experienced!

  32. James says:

    I’ll take that as two yeas, then? Republicans think this is a good idea?

  33. anjin-san says:

    This has to be the dumbest thing said in this discussion.

    Believe it or not everything isn’t Bush’s fault and the problems that led to the current crisis didn’t start 8 years ago, they started a good 15 to 20 years ago.

    Will have to keep this in mind the next time I hear Republicans carrying on about the awful “Carter economy”,,,

  34. Floyd says:

    Suit yourself James. You are,after all,”more experienced!” [lol]

  35. James says:

    So far, I’m getting that some Republicans think it’s a good idea as long as they can blame the mess on liberals, and non-Republican punks who don’t really understand the deal.

    But I was hoping to hear from normal people who are Republicans.

    Do Republicans think that this $700 billion dollar purchase of worthless assets at taxpayer expense without oversight or accounting, or any accompanying proposal to pay for it, is a good idea?*

    Seriously, I am asking. Do you Republicans think this is a good idea?

    *Apparently they are looking at bailing out foreign banks and such things as bad student loans, credit card debt, and car loans as well.
    Source:Bloomberg.com: Worldwide

  36. just me says:

    Do Republicans think that this $700 billion dollar purchase of worthless assets at taxpayer expense without oversight or accounting, or any accompanying proposal to pay for it, is a good idea?*

    No I don’t think bailing them out without any conditions is a good idea, but I think it is just as bad an idea to have the wrong kind of conditions.

    What both parties need to do is honestly look at the mess and figure out where it went wrong-and have conditions that fill in those areas, but blanket feel good conditions aren’t going to make the problem go away anymore than no conditions.

    Shoot the real republican in me wants nothing more than to not bail any of them out-they took the risk they should take the fall, but I suspect letting that happen would be an even bigger mistake than the bail out.

    I don’t really think there is a “good” answer to this one-it is really choosing between the lesser of two bad things.

  37. just me says:

    James-here is another opinion by a republican-you might recognize his name.

    http://corner.nationalreview.com/post/?q=ZGE5MmE0YmRiODA3YTRiNzFlN2FmNDU5N2I0ZDc3YTE=

    I think he makes some excellent points about this whole mess and the proposed bail out and what questions need to be asked and what congress should be doing.

    I think the problem right now is this really is a mess created for decades and neither party has clean hands, but the Dems and the GOP are too busy finger pointing to think about what the solution really needs to be.

    You just can’t lay this problem in the lap of any one man or any one administration or any one party.

  38. James says:

    Just me,

    Thanks for the link. I’m encouraged.

    I asked my original question because my father (God rest his soul) was a staunch Republican. I can only imagine his white knuckles and livid face had he lived to see his Republican Party sign on to a scheme like this. I was just wondering if any of that Republican Party existed any more, or if all y’all had turned into authoritarian corporatists and/or angry bitheads these past years.

    I see Gingrich hasn’t.

    Again, thanks for the link. I would have missed that.

    Anyone else?

  39. angellight says:

    “In 2007, Wall Street’s five biggest firms– Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley – paid a record $39 billion in bonuses to themselves.” ABC’s Political Punch — I say no Bail Out!

    AND

    Senator John McCain’s campaign manager, Rick Davis, was paid more than $30,000 a month for five years as president of an advocacy group set up by the mortgage giants Fannie Mae and Freddie Mac to defend them against stricter regulations!
    More McCain Hyprocrisy

  40. Bithead says:

    James, if by my actions, I level your house, would you want me to pay to have it restored?

  41. G.A.Phillips says:

    But I was hoping to hear from normal people who are Republicans.

    crap that leaves me out.