Recovering from the Thanksgiving holiday, Americans can be grateful for a government huge enough to work against itself. As cornucopian benefits flow from Washington, Uncle Sam turns out to suffer from Bipolar Bailout Disorder. Like a taxpayer-funded Push Me-Pull You, he goes both ways while consuming enormous resources on the road to nowhere.
Today’s gargantuan mess started largely because Washington used Fannie Mae and Freddie Mac to promote affordable housing. “The more pressure there is on these companies, the less we will see in terms of affordable housing,” Rep. Barney Frank (D., Mass.) said in 2003. He described Fannie and Freddie as “fundamentally sound” and added: “I want to roll the dice a little bit more in this situation towards subsidized housing.”
Well, it worked. America is awash in affordable housing. Home prices in 20 major cities plunged 16.6 percent last quarter. That’s bad news if you’re selling, but a bonanza for those seeking affordable housing.
So, rather than declare “mission accomplished,” Uncle Sam has cannon-balled into the mortgage markets to jack up housing prices.
Which is it?
Last September 24, G.W. Bush claimed the $700 billion bailout would relieve distressed banks of “troubled assets that are clogging the financial system.” But just seconds later, Bush continued: “…the value of many of these assets will likely be higher than their current price, because the vast majority of Americans will ultimately pay off their mortgages.”
In that case, are these assets really troubled, or just hung over? If the latter, why not calm down, let them sleep it off, and then arise after a decent interval?
The Troubled Asset Relief Program then endeavored to rescue teetering banks. But to do so, Treasury dragooned prosperous banks into accepting bailout money so their needy competitors would not be stigmatized. This is like a supermarket whose affluent shoppers must accept and spend Food Stamps so low-income customers with Food Stamps don’t appear poor at the checkout stand.
“I think it’s absurd,” says the director of one small mid-Atlantic financial house. “We are a profitable bank. We have zero non-performing loans. We have more capital than we are required to have. We arguably are overcapitalized from an economic and a business point of view. Our only constraint on lending is the demand of credit-worthy borrowers. Our lenders are on the street every day, as they have been throughout this financial crisis, looking to make new loans. Despite that, we are being offered this relatively low-cost capital in the form of this preferred stock to be bought by the federal government.” This bank officer estimates that the Fed is ready to hand his hale and hearty institution between $4 million and $5 million.
This banker notes “the ironic escalation of the interest rate.” The terms of the loan, he marvels, are “five years at 5 percent, then it goes to 9 percent.”
In other words, Washington is giving banks adjustable-rate loans. This perfectly parallels the adjustable-rate mortgages that steered us into this ravine in the first place.
Bailout season began with G. W. Bush, Federal Reserve Chairman Ben Bernanke, and Treasury Secretary Henry Paulson — the Moe, Larry, and Curly of economic policy — insisting that America needed a $700 billion bailout as urgently as a rattlesnake-bite victim requires anti-venom.
“Americans’ personal savings are threatened,” Paulson panted in September. “The ability of consumers and businesses to borrow and finance spending, investment, and job creation has been disrupted.”
But then Comrade Bush created the world’s biggest starting bonus. He decided to leave half the bailout budget in the Oval Office desk for Barack Obama to allocate. (This bizarre act of generosity with other people’s money invalidates the notion that Bush failed because of a “my way or the highway” attitude. Bush flopped because he was so busy spooning with liberal Democrats that he left his free-market allies shivering on the kitchen floor.)
Assuming Obama spends that $350 billion on inauguration day, three months and 17 days will have passed since the bailout’s October 3 enactment. So, at least half the “desperately needed” bailout proved unnecessary.
“The government has gone wild, much wilder than anybody thought it would, “Casey Research economist Bud Conrad told Budget & Tax News. “The Federal Reserve — it’s supposed to have reserves — has loaned out so much money that the net effect is its reserves are negative. It’s totally out of control.”
Rep. Ron Paul (R., Tex.) laments, “It seems that eventually the entire economy is going to be blanketed over with Federal Reserve notes.”
“We’ve moved beyond show me the money,” writes economist and CNBC host Larry Kudlow. “This is throw me the money.”
The GOP would not have let either a President Albert Gore or a President John Kerry get away with such aggressively socialist policies as the allegedly “conservative Republican” Bush administration’s dizzying parade of massive outlays, fiscal injections, equity purchases, mandatory subsidies, and even nationalizations.
These and other new commitments — totaling a mind-blowing $8.347 trillion and counting ($8,347,000,000,000) — assume that Washington should pump money into the economy. But it cannot do so without sucking money from the economy. Uncle Sam cannot spend a dollar without first extracting it from taxpayers or lenders, or by printing it in order to spend today the purchasing power that inflation will demolish tomorrow.
Meanwhile, Paulson (who, strangely enough, served as White House assistant to Watergate conspirator John Ehrlichman) has careened from purchasing “toxic” assets, to nationalizing AIG, to letting Lehman Brothers drown, to swapping cash-for-partial nationalization of banks, to buying corporate paper, to Tuesday’s flashes of genius: $600 billion to buy bad mortgages plus $200 billion to encourage auto-finance and credit-card companies to help Americans sink even further into debt.
Hank Paulson’s next brainstorm surely will surprise every American — starting with Paulson. Give him credit for this: He has turned the Treasury into America’s costliest improvisational theater company.
As for Barack Obama, he envisions yet another stimulus package worth perhaps $700 billion. His senior advisor, Austan Goolsbee, told Face the Nation on November 23: “It’s going to be a number big enough that when they spell it out, it looks like ‘Oooooooooooh!’ with that many zeroes on it.”
– Deroy Murdock is a columnist with the Scripps Howard News Service and a media fellow with the Hoover Institution. © 2008 Scripps Howard News Service