At a FreedomWorks dinner, Columnist George Will gave a speech recounting the failures of politicians to stand on principles of limited government. Referring to 1979 he stated that “conservatives didn’t oppose the Chrysler bailout because it might fail; but because it might work.”
The bailing buckets are out again. The potential failure of Bear Stearns supposedly required massive government action because it was ‘too big to fail’. The bailout debates typically ended with the statement, “there was no other choice”. Common sense dictates that a simple question should be asked – how is ‘too big’ determined? Shouldn’t the local corner store also get bailed out if it fails? Small businesses failures have economic consequences. Sadly, liberals and Big Government types are thinking – what a great idea. But the problem isn’t where the line should be drawn for bailouts; the problem is the very concept itself. Government intervention merely creates far bigger problems in the future.
What’s next? Congress proposes a massive bill that will bail out irresponsible borrowers and bankers. This bill will allow bankers to choose up to $300 billion in loans to pass off to the government. Now, if you were a banker, and you have two loans, one which will probably be paid off, and one which will not, which do you give to the government? In fact, the Congressional Budget Office predicts that at least 35% of these loans will default. Hardworking, responsible taxpayers will pick up the tab.
This bill helps people with McMansions. I didn’t realize that people who own $700,000 homes were struggling families.
For Pennsylvanians it is even worse. 89% of the problem mortgages are in four states – Arizona, California, Florida and Nevada. A significant percentage of Pennsylvania tax dollars will be going to these states.
The two FHA public-private partnerships, Fannie Mae and Freddie Mac, own half of $12 trillion in mortgages. If the government guaranteed these loans, it would double the national debt. Of course, there were never any explicit government guarantees for these organizations. Their sole function was to minimize risk in home mortgage capital markets. When you minimize risk, you always get riskier behavior by providing a false safety net. We were told that the government would never be exposed to any risks from these organizations. That was, until Monday, July 14th. I guess they are also ‘too big to fail’. But it is even worse. These organizations were also tasked, by government policy like the Community Reinvestment Act, to make it easier for risky borrowers to qualify for mortgages. We are reaping the results of Big Government do-gooders.
Many investors realize that these public-private partnerships, a term that could also be called socialism, are usually losing ventures. The Federal Housing Authority recently lost $4.6 billion. During the year, Fannie Mae stock was as high as $70 ½ and has steadily declined. On Monday, July 14th, it was worth $7. Freddie Mac has followed a similar downward spiral.
Due to an actual bank run, IndyMac Bank was recently taken over by the Feds. Older citizens who recall the Depression will shudder. According to a recent CNN report, 90 other financial institutions face significant problems. Will these be bailed out, or are they ‘small enough to fail’?
There are calls for the Federal Reserve, totally unaccountable to Congress or the people, to become a super regulator. This is typical government thinking; advocate more government. Why would politicians support this? It’s called A.O.R – Avoidance of Responsibility, a rapidly growing practice at all levels of government. If the Federal Reserve is responsible, and politicians can do nothing about the Fed, they can wash their hands and point fingers.
But there is a far bigger problem facing financial institutions. Government borrowing, from city hall and the school board to Washington D.C., is at unprecedented levels. These obligations are unsustainable without massive tax increases. What happens when government entities, deferring current responsibilities with debt, begin to default? Maybe this looming crisis is the real reason for all these bailouts.
There is hope. According to a Rasmussen poll, only 21% of likely voters support the bailout bill. Only 11% of likely Republican voters support it. Only 31% of Democrat voters support it while 37% of Democrats oppose it. Even a significant portion of Democrats favor principles of limited government. Average citizens are far wiser than many politicians.
I agree with President Reagan’s First Inaugural Address when he stated, “in our present crisis, government isn’t the solution to our problem; Government is the problem.”