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Kay Bailey Hutchison, I'm looking at you..........
Broke? Blame The Government
Brian S. Wesbury and Robert Stein 01.26.10, 12:01 AM ET
Last week President Obama announced a new set of policies to deal with financial ins utions that are "too big to fail." While a debate about too-big-to-fail ins utions and policy is important, a more critical set of issues is being ignored.
First the Federal Reserve should have followed a rule for monetary policy, such as using the growth rate of nominal gross domestic product to guide short-term rates, or a gold standard, or the Taylor rule. If they had, the federal funds rate never would have been cut to 1% in 2003 and housing over-investment would have been either nonexistent or much less damaging.
Second, if mark-to-market accounting rules had not been re-ins uted in late 2007, loan problems would have never spread as far or as fast as they eventually did in 2008. Mark-to-market accounting rules are pro-cyclical in the extreme--there is a reason FDR got rid of them in 1938. These accounting rules--which require banks to price assets to illiquid market bids, even when cash-flows are unimpeded--turn a problem in the financial system into a catastrophe.
The banking crisis of the early 1980s, also largely created by easy Fed policy, had more loan losses than the beginning of the 2007-08 crisis. Adding the early '80s bad debts in agriculture, oil and Latin America to those of the Savings & Loan Industry created bank losses of roughly 6% of GDP. Subprime and Alt-A loan losses in 2007 were roughly 4% of GDP. But once mark-to-market accounting started to accelerate, even those smaller losses undermined confidence and created a vicious feedback loop which put the system in jeopardy. While some argue that it is too-big-to-fail ins utions that create systemic risk, it's really misapplied government action and policy that creates this risk.
Government action and reaction is why a large (but nonlethal) set of banking losses spread so rapidly and turned into the Panic of 2008.
Instead of suspending mark-to-market accounting rules in 2008 the Fed, Treasury, SEC and FDIC arbitrarily saved certain firms while allowing others to fail. The crisis accelerated after Lehman Brothers collapsed, which then led to more government bailouts. Instead of allowing banks to value loans using cash-flow, the government forced these loans to be priced to illiquid market prices. When this put ins utions in technical violation of arbitrary capital requirements, Treasury Secretary Hank Paulson forced these banks to swallow TARP money and accept government ownership.
Many conservatives, who profess to believe in free markets, supported these government actions. In a de facto sense this support for government bailouts created a vacuum in Washington. People say, "If conservative Republicans supported emergency bank bailouts, then John Maynard Keynes must have been right. The free market system is inherently unstable. We need the government to save us from the animal spirit of greed." There are few left to defend free markets.
But Keynes wasn't right. It was government that caused the Panic of 2008, not the private financial system. If government had run a stable monetary policy and hadn't artificially boosted housing or enforced a dumb accounting rule, the Panic of 2008 would not have happened.
Unfortunately, many leading conservatives do not see the world this way. They panicked in 2008 and supported government bailouts. This leaves them with little firm ground to stand on when debating the merits of more government action against banks.
With any luck, creative politicians can figure out how to cir vent this political stumbling block and focus on fixing the real problems of the financial crisis. Following a price rule for monetary policy would minimize the potential for bubbles, while suspending mark-to-market accounting would end the potential of a crisis spinning completely out of control.
Brian S. Wesbury is chief economist and Robert Stein senior economist at First Trust Advisors in Wheaton, Ill. They write a weekly column for Forbes. Brian S. Wesbury is the author of It's Not As Bad As You Think: Why Capitalism Trumps Fear and the Economy Will Thrive.
Kay Bailey Hutchison, I'm looking at you..........
Really? It wasn't the government owning toxic assets not worth a damn. It wasn't the government insuring those assets without backing them up. It wasn't the government that needed a bailout.
And the government was, by all accounts, running a stable monetary policy. It's just that when the interest rates hit zero, that's where monetarism ends...
Now, we can blame the government for the deficit spending, but you can't tell me private banks are innocent on this thing...
What amuses me is that we pretend that our government hasn't been engaged in stimulus for years, nay, decades, prior to the Credit Crisis/Great Recession/whatever. From monetary policy providing easy money and low rates, to fiscal policy keeping taxes low and spending high (and higher) by levering up the nation, to the public/private sham of Fannie & Freddie subsidizing the home building, mortgage, and real estate industries, this entire system has been stimulating US like a mofo for decades.
Yes, the bailouts sucked, but without an explicit transfer from the people to Wall Street, nobody cared. Or, since the Great Stimulus ceased to work, the people got mad.
How we have come to accept that the role of the federal government is not to preserve individual liberty in the Republic, but rather to do all it can to stimulate material "progress" is something the people should question. If they can avert their attention from the latest American Idol season to do so.
I'm not broke.
I'm not broke either....but I feel the working man's pain...
...which brings me to a GOP talking point that they never get called on...
The Obama government has taken over banks, investment firms, the car industry, housing...yada...yada...yada...I'm sure we've all heard it before...
What I want is a wing-nut to tell me exactly which companies the government owns..
Ford?
Chevy?
Citigroup?
AIG?
GM?
Last I checked these companies were still privately owned...
The US government does technically own GM (including Chevrolet) at this point, along with the Canadian government and a pension trust fund. There will apparently be an IPO for the reorganized company sometime this year.
You didn't do a very good job of checking then. As Chump pointed out, the government owns most of GM and Chevy = GM. The government also owns 80% of AIG. As of last September the government also had a 34% stake in citigroup, but citigroup was trying to reduce that. Not sure if they ever did.
Ford is the only one on your list who's never had the government take an ownership stake in it.
So the one company that the U.S. govt holds a majority interest in will be offered in a public offering soon...doesn't support the GOP rhetoric that the govt. is attempting to take over private industry...
GM orchestrated the 9/11 attacks, obviously.
So? Can I go online and buy shares of AIG and Citigroup?The government also owns 80% of AIG. As of last September the government also had a 34% stake in citigroup
Yep. Whatever shares aren't owned by the government can be purchased on the open market.
The govt. bought low...any savy investor will tell you that's a good thing...what kinda investment did Dubya make in Iraq in taxpayer money and American and Iraq blood? Where is the return there?
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