Hysterical Perspective

(lunch break)

A friend pointed me to this WSJ article:

Government Bailouts: A U.S. Tradition Dating to Hamilton

The thesis appears to be that every time there has been a financial crisis, government has stepped in with a bailout, and this time is no different.

I respectfully…  disagree.

The article starts with the Panic of 1792.  I do not know anything about that, so I will instead start from the end of the article and work toward the beginning.

Savings and Loan Crisis

In 1989, after eight months of debate, Congress created the Resolution Trust Corp. to make depositors whole, investigate allegations of wrongdoing and deal with the husks of the S&L industry.

At the time, skeptics warned that government was reaching too far into the marketplace, and predicted darkly the RTC would be saddled with bad assets for generations.

This summary is so disingenuous that it is almost a lie.  The RTC was formed to dispose of assets that the government had already seized from institutions that had already failed.  The only “bailout” was for depositors, who were arguably victims of the crisis, not perpetrators.

The TARP is the exact opposite; it will buy assets from bad banks, not seize them.  Had the government stepped in at the start of the S&L crisis and bailed out those institutions that had made the most hideous investment choices, then perhaps the RTC would be a good analogy for the TARP.  But the only reason anyone mentions the RTC in this context is that lawmakers consider it a “success”.

I have no idea what the second paragraph is talking about.  Since the government already owned the assets of the failed institutions, the taxpayer was going to be “saddled” with them regardless.  The RTC simply disposed of the assets slowly, thereby losing less taxpayer money than originally projected.  It still lost billions.  This is what Washington thinks of as a great success…  But again, it has no similarity to today’s bailout.

The Great Depression

By 1933, four years after the infamous stock-market crash, about 1,000 American homeowners a day were losing their houses to the bank. President Franklin Delano Roosevelt and Congress created the Home Owners’ Loan Corp., an ambitious government agency designed to prevent foreclosures on an enormous scale.

The agency bought defaulted mortgages from banks, then refinanced them at lower rates for fixed, 15-year terms.

I am not intimately familiar with the HOLC, but I do know a few things.

By 1933, the Great Depression was already well underway; the housing crash of the 1930s was merely an effect, not the cause.  More importantly, underwriting standards were much more strict back then, meaning the failed loans were not bad from the moment they were originated.  The Depression itself made them bad, which is why the HOLC ultimately turned a profit.  And the homeowners facing foreclosure and their lenders were the victims, not the perpetrators.

Today’s crisis is the opposite.  It was caused by borrowers, brokers, lenders, securitizers, and investors (*) working together to put hundreds of billions into loans that could never be repaid and near-worthless securities backed by those loans, and the TARP is meant to purchase the worst of them.  The loans were bad even before the current recession started, and they will still be bad when (if?) it ends.

(*) As an aside, I propose BBLSI — pronounced “bubblsey” — as a new acronym.

In the 1920s, speculators levered up 10-to-1 to buy stock in companies whose entire business plan was literally to issue more stock.  The logical consequence finally arrived in 1929, when many suddenly realized they had put their entire life’s savings, times 10, into worthless pieces of paper.  Should the government have immediately stepped in to purchase those pieces of paper?  Because that is what the TARP proposes to do now.

The Panic of 1907

No public money was used.  In fact, the government was not involved at all.  So I do not see how this has anything to do with the article’s thesis.

1792 to 1907

Um, wait, the article totally skips over this period.  Hm, I wonder why.

The Panic of 1792

I guess I need to read more about Alexander Hamilton.

…

You can say that the proposed bailout will provide the greatest rewards to those who made the worst investment decisions.  You can say that it will reward the perpetrators at the expense of the victims.  You can say many things, but you cannot say that it has any precedent in U.S. history, even approximately.

P.S.

Speaking of history, have you ever read about Executive Order 6102?  (hat tip TC)