Ken sent me some articles with opposing views on what's being commonly referred to as the "bailout" bill.  The one that failed in the House yesterday and sent the stock market into a 770 point dive.  (I'm somewhat heartened to see that we're up about 200 points so far today, but I fear we're one piece of bad news away from another nosedive.)

I wrote him a lengthy response to the first article, Bankruptcy, Not Bailout is the Right Answer.  The article's author, the somewhat dishy Harvard lecturer Jeffrey Miron, makes the case that apparently many Americans bought into about letting Wall Street pay for Wall Street's misdeeds.

I'm posting my (slightly edited) response to Miron's arguments here because I think it's a better encapsulation of my thoughts on the matter than my previous post.  I hope it helps to have these contrasting points of view (you'll want to read Miron's article too by clicking on the link above).

(And I'd also urge each of you who frequent this page to express your own opinion to congress via congress.org.  It's easy.  But more than that, it's necessary.)

First, it's important to keep in mind that Miron is a libertarian.  So he's predisposed to be against government intervention of any kind.  This shows up in his list of "solutions" to the crisis.   My first objection to his position is that he describes this as a simple "bailout."  I don't agree, especially as the legislation ended up prior to defeat, that it was a simple bailout.  There was participation for the taxpayers/government in future profits from the "bad debt" assumed by the government.  There were caps on the wages and severance packages of those who presided over risky lending practices.  I agree with Pelosi that these changes made the program an investment rather than a bailout.   Also, as a historical point, this type of thing has been done before.  When Dan and I were involved with a major bank, the bank spun off its bad debt into a "bad bank" to improve liquidity and allow us to keep lending.  This saved the bank and the "bad bank" eventually proved profitable.  On a larger scale, a number of other nations saved their economies in recent years by doing similar bailouts or even by nationalizing the financial system.  By contrast, we have the Great Depression where government did too little, too late.   My second objection is his idea that letting these companies fail would merely mean that "someone else would own them" via the bankruptcy process.  Not what happened with Enron, if I recall.  And he ignores the fact that more than just the investors get hurt in bankruptcy.  Rank and file employees get wiped out and there's a ripple effect as their financial meltdown affects those with whom they do business.   I think yesterday's 770 point drop in the DOW shows that those who believe a bailout will prevent widespread economic collapse are NOT "ridiculous fear mong[ers]."   Lastly, I don't agree with his final (brief and, I'd argue, flippant) two paragraphs of prescriptions for what to do instead of the bailout.   "So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.  The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer."  1.  I agree (as I blogged) with the idea that "abandoning the goal of home ownership independent of ability to pay" is a change we need to make, philosophically.  But that doesn't fix the current problem.  2.  Get rid of Fannie Mae and Freddie Mac?  Why on earth would he propose that?  The function of Fannie Mae and Freddie Mac (as parsed out this morning by Dan and I) is to provide liquidity to mortgage lenders by packaging like loans into securities.  If we eliminated the FM twins, private packagers would take over their function in a much less efficient manner due to their size constraints.  What makes more sense is to regulate FM/FM more closely, to severely restrict sub-prime lending (which is happening already as a natural function of the market).   And again, this doesn't address the current problem.  3.  Get rid of CRA?  Why?  The Community Reinvestment Act requires banks to develop means of investing in poorer communities by providing "B" level loans with the profits they make from "A" level loans.  It's a reasonable program and not at all responsible for the current crisis.  Although it's easy to understand why a libertarian would be against it.  And again, this doesn't address the current problem.

4.  Miron's final statement that "someone" has to pay for the subprime lending that shouldn't have taken place in the first place is a statement of fact.  The idea that it shouldn't be the "American taxpayer" is, imho, subterfuge. 

If the American taxpayer is also the American worker, employee, business executive, etc., (and he/she is), the American taxpayer will pay one way or another.  The question is, will we pay as a nation in a measured, controlled way with government oversight and (I believe) appropriate intervention?  Or will we pay as individuals through lost jobs, plummeting retirement investments, severe economic recession and reduced opportunity?

That's the true choice.  To pretend otherwise is disingenuous and naive.

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