Sunday, September 21, 2008


A Humble Opinion

Some liberal bloggers have commented that the conservative bloggers and pundits have refrained from criticizing the federal government's bail-out of several large financial institutions (Freddie Mac, Fanny Mae, Bear-Stearns, AIG, others). If similar action were taken when a Democratic President occupied the White House there would have been screams of socialism, nationalizing the banks, etc. This reticence has led me to wonder whether there is another way that could have been used to keep the credit industry from collapsing.

Let's consider what the government has done and is doing. Credit institutions were loaded with bad debts. These debts were incurred at a time when most people thought the housing boom would continue indefinitely. Mortgages were written for close to the market price of homes. These mortgages were sold to credit institutions like Freddie Mac who in turn bundled them with other obligations and wrote new bonds based on them. Credit rating institutions gave these new bonds good ratings so that Freddie Mac and others could sell them to other banks. Then the housing bubble burst and many of the mortgages suddenly became worth a lot less. A $500,000 mortgage on a foreclosed house that can be sold for only $400,000 isn't worth as much as it was before the housing bubble burst. Financial institutions were suddenly realizing that their A-rated bonds weren't worth very much and they would have to take a loss. Some big banks would have to declare bankruptcy. Businesses would no longer be able to obtain credit for conducting or expanding their operations. A recession or a depression was about to occur. The government then proceeded to buy the bad debts from the banks that were about to fail. In return, the government obtained controlling interests in the banks. That is, a conservative administration nationalized several large banks and a large insurance company.

Here's my alternative: Since the problem was that the large banks couldn't advance credit any more, why shouldn't the government set up its own credit institution and lend money directly to the businesses and smaller banks that needed the credit? Let the big banks go bankrupt. Let them eat their losses. The cost to the government would be a lot less and the risk very small. Of course, that would have been socialism with a capital S (or $). What Henry Paulson and Ben Bernanke have proposed is socialism with a small s, and one that is temporary.

Conservative ideologues such as Grover Norquist must be having bad cases of indigestion at seeing the utter abandonment and collapse of their small-government beliefs.

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