I just got off the phone with Ed Lazear (Chairman of the President’s Council of Economic Advisors), and he made a good case for the severity of the crisis, esp. negative interest rate on t bills. It got bad last week. The sun turned to sackcloth, moon ran blood red, burning hailstone, etc….crazy stuff. Something had to be done.
The problem is that they are just beginning to understand what a few of us (including Larry Kudlow and Steve Forbes) have seen all along:
Over-regulation brought us to this crisis, not under-regulation. If we get the diagnosis wrong, then the prescription will be wrong too.
Think of the analogy of a ‘bail out’: someone knocks a hole in a boat and the water rushes in. The crew bails water out of the boat to keep it from sinking. If things are really bad, another boat comes and helps. This analogy points to the real problem: the hole! If you patch the hole early, no bailing is needed. If you patch it very late, the whole ship needs to go into dry dock. But the bailing out only makes sense in the context of patching the original problem. The worst thing to do would be to allow the ship to sink to make some kind of populist political point. No, revise that:
The worst thing to do would be to take the left’s view and say “too much water in the boat, let’s knock more holes into it so the water can get out.”
That’s what more regs would mean. Place salary ceilings on “every company that benefits in any way whatsoever from the bailout” as Barney Frank said today on CNBC, and you’ll get a talent exodus. Give judges the power to obviate existing mortgage contracts with investors around the world - the dollar will plunge. Every one of those proposals is another hole in the boat.
The best thing to do is to patch the holes. Here they are:
Some are talking about putting a hold on the mark to market regulations. That’s a start but not enough. Don’t suspend mark to market, abolish it. It’s part of the whole Sarbox, Spitzer, FAS 157 wave of punitive regulation after Enron. It makes no sense to impose and universalize temporary downturns, especially during panics.
Abolish the Bank Holding Company Act. It’s a remnant of the 1920s before branch banking. Its only current effect is to keep private equity from buying majority stakes in troubled banks. Goldman’s decision yesterday just illustrates the problem. They had to change structure in order to buy up other banks. This is nuts. Get rid of this dinosaur and private equity will start the capital infusions.
Abolish the Community Reinvestment Act. Forcing banks to make minority loans is the original sin out of which came the Subprime mortgage industry. Let banks decide where to loan; that’s their job. Leave identity politics out of our credit system.
Do all of the above and I’m not at all sure that any bailout would still be needed. Before we subsidize these institutions, let’s stop the things we are already doing to collapse them. Back to Hippocrates: First of all, do no harm.
