Alexander's Column

Commentary on the Financial Crisis (Updated Regularly)

Mark Alexander · Oct. 2, 2008

(NOTE: This is a regularly updated supplement to “Economics 101: Crisis of Confidence”, Mark Alexander’s comprehensive analysis on the current financial crisis)

For information about the origins of this financial crisis, I refer you to the following quoted commentary, which is updated regularly (newest quotes at the top of the page). For video and news links regarding the origins of this crisis, see Video and news links on the financial crisis

Keep in mind, as my Heritage Foundation colleague Brian Riedl notes, “Think $700 billion to bail out Wall Street is expensive? Just wait. The mortgage meltdown is cheap compared with the coming fiscal firestorm fanned by unfunded Social Security and Medicare costs. Together, these programs hold unfunded obligations totaling $41 trillion – 60 times larger than the proposed Wall Street bailout.”

Commentary on the continuing crisis

“Feeling a bit, well, depressed? It’s not surprising. Headlines around the world are filled with the D word, as if an epic global economic collapse were inevitable – especially here in the U.S. It isn’t. No, we’re not hopelessly out of touch. As our coverage shows, we know how serious the current financial mess is – and how important it is to the U.S. and the rest of the world that we begin to settle down our markets. The loss of $8 trillion in stock market wealth in a matter of months is no small thing. The dive will have a major impact on people’s spending and investment decisions. A new economic forecast of 52 leading economists shows most expect the U.S. economy to shrink in the third and fourth quarters, plus the first quarter of 2009 – the first time in nearly half a century that the economy will undergo three quarters of contraction. In short, we might be in for a brief, yet brutal, recession. But talk of a depression and other apocalyptic possibilities are way overdone. … This is the U.S.‘ edge – and it’s not going away soon. Since 1980, real per capita GDP has expanded 69.2% in the U.S. vs. 65.6% for the EU 15. Why? Our productivity is greater. In just the last 10 years, U.S. productivity has expanded 2.5% a year, with Europe growing nearly a full percentage point less. This will widen. … Financial crisis notwithstanding, the U.S. economy will be twice Europe’s size by 2025. Even after our stock market and housing losses, the U.S. is still extraordinarily wealthy. In the second quarter, Fed data show, the U.S. private sector owned $110.6 trillion in assets – an immense amount of wealth. The estimated $1 trillion to $2 trillion cost of the current financial mess is small by comparison. During the Great Depression, U.S. output plunged 27% in four years; unemployment neared a third of the work force. Real private investment shrank 87% in three years; personal spending plunged 41%. We’re not close to that. Nor are we likely to be – unless we foolishly pursue high-tax policies that would kill growth. It’s easy to give in to excessive pessimism these days. But the U.S. model – based on productive labor, free trade, fewer rules, lower taxes and rewards for entrepreneurial effort – is still sound. We’ll soon emerge stronger, and better, for our current tribulations.” –Investor’s Business Daily

“Now, the U.S. Treasury is considering buying banks. Buying banks. That is to say that if Bob’s Bank in Godknowswhere, West Wiscarolina is going under, the U.S. Department of the Treasury is considering bailing out Bob’s Bank by buying it. Here’s the Washington Post’s take on this excellent new obligation you and I are about to take on: 'The Bush administration is hammering out the final details of a plan that would allow the government to inject cash into banks in exchange for ownership stakes in an effort to shore up confidence in the faltering financial system, according to officials and sources who have been in contact with the Treasury Department.’ I do not want to own Bob’s Bank. Or any other bank. Especially if the geniuses who have been running the bank have run the bank into the ground. What am I missing here? If you read the WashPost’s report on what the Administration is now proposing, you and I are going to be on the hook for the banks’ bad loans. But, because our money is not THEIR money, the Post reports ‘What is less clear is what strings would be attached, particularly regarding the compensation of top executives at participating banks.’ Here’s my plan for compensation of top execs at participating banks: Nothing. Nada. Zero. Bubkis. Not a farthing. If those executives don’t like my compensation plan? They can quit. They can leave in a huff. If they don’t like that, they can leave – in the words of the Marx Brothers – they can leave in a minute an a huff. We’ll get someone else. How about the guy who slices the bagels at the breakfast place on Pennsylvania Avenue? He cannot possibly do any worse than the slug with an MBA from Harvard. Am I wrong? I want the people who got us into this mess drawn and quartered. I do not want them to go to the Spa at some five star hotel in California on my dime. Or yours.” –Rich Galen

“The [Wall Street] crisis came partly because so many households decided that it would be jolly fun to budget the way government does, hitching outlays to appetites. Beneath Americans’ perfunctory disapproval of government deficits lurks an inconvenient truth: They enjoy deficits, by which they are charged less than a dollar for a dollar’s worth of government. Conservatives participate in this, even though deficits fuel government’s growth by obscuring its cost. The people can emulate the government because credit has been democratized. Democratization of everything is supposedly an unquestionable good, but a blizzard of credit cards (1.5 billion of them, nine per cardholder), subsidized loans and cheap money has separated the pleasure of purchasing from the pain of paying. Furthermore, the entitlement mentality fostered by the welfare state includes a felt entitlement to a standard of living untethered from savings. Populism flatters the people, contrasting their virtue with the alleged vices of some minority…[T]oday, the villain is ‘Wall Street greed,’ which is contrasted with the supposed sobriety of ‘Main Street.’ When people on Main Street misbehave by, say, buying houses for more than they can afford to pay, they blame the wily knaves who made them do it.” – George Will

“The financial services sector is over-leveraged and too large. Winding this down will, indeed, impose painful costs. Congress is seeking to explicitly transfer these costs to taxpayers, who will underwrite a new government plan devised to correct the old government plans. Taxpayers are being called upon to make a significant sacrifice, with little evidence to suggest that the troubled markets will be settled. In fact, there is evidence to suggest that the latest intervention will delay the required adjustments in the financial services sector. The $700 billion intervention is just the largest, latest in a series of failed bailouts with no guarantee that the desired outcome will even be achieved. As a Public Choice professor, I used to begin class each semester with Armey’s Axiom number one: ‘The market is rational and the government is dumb.’ Those quick to call for more regulation forget the power of markets, and refuse to acknowledge government culpability in the current mess. Time and again, governments the world over have attempted to outsmart the market and the current legislation is no exception. And time after time, markets respond, toppling the best-laid government plans as they move to correctly price the underlying assets in exchange.” – former House Republican Leader Dick Armey

“Liberalism, as an experiment against common sense, undermines every institution it touches, including financial ones. In the age of political correctness, the conservatism of the banking industry was bound to give way to mindless multiculturalism and Great Society babble. Tried-and-true lending principles were deemed illiberal and imprudent loans became a form of ‘progress.’ Whatever the area that falls under it – whether it is banking or education – liberalism’s regulatory regime consists of forcing people to adopt ideological goals which defy rationality: banks are told not to insist on such outmoded tests as good credit; schools are told not to insist on good test scores for admission. High standards across the culture have eroded under liberalism. Why not in banking too? Indeed, given the choice between economic decline and political correctness, liberals always choose the former. To preserve the kangaroo rat, they will cut jobs. To advance faddish global warming theory, they will undercut whole industries. Instead of bemoaning economic decline, they normally interpret it as a measure of enlightenment: that some worthy ideological goal, far more important than money, is slowing business down.” – George Neumayr

“At the end of the day, we’re not being asked to bailout Wall St. so much as we are the Democratic Party.” –Laura Ingraham

“We have a political party trying to create as much irresponsibility and lack of accountability as they can. They’re destroying people’s lives and their ambition. They’re robbing them of the opportunity to use the freedom and the prosperity this country offers to make something of themselves. There’s a war for the soul of America going on, and one side doesn’t understand the gravity of it.” –Rush Limbaugh

“Absent Fannie and Freddie – absent government manipulation of the housing market – would there have developed the excessive diversion of capital into the housing stock?” –George Will

“I think the responsibility that the Democrats have may rests more in resisting any efforts by Republicans in the Congress … to put some standards and tighten up a little on Fannie Mae and Freddie Mac.” – Bill Clinton

“Like a lot of my Democratic colleagues, I was too slow to appreciate the recklessness of Fannie Mae and Freddie Mac. In retrospect I should have heeded the concerns raised by their regulator in 2004. Frankly I wish my Democratic colleagues would admit that when it comes to Fannie and Freddie, we were wrong.” – Alabama Democrat Rep. Artur Davis

“Only a fool would say that there is no risk to the banking system here. But given the apparent lack of any idea at Treasury or the Fed of how the bail-out would actually work, the terrible track record of those same authorities whose bungling of the Fannie Mae, Freddie Mac and American International Group situations only accelerated the crisis, and the onerous capital-punishing provisions being forced into the plan by Congress, at this point we are tempted to think that the world might be a better place without this particular bail-out… . The climate of fear in Washington could easily still force a deal in very short order. No deal would be a shock to markets at first, and it would be a shame to lose what was good about the proposed program. But if it’s loaded up with mortgage forbearance mandates and punitive equity grabs, then markets will be far worse with a deal than without one” – Donald Luskin, chief investment officer of the consulting firm TrendMacro

“Congress must not hastily embrace a cure that may do more harm to our economy than the disease of bad debt.” –Rep. Mike Pence

“[The Bailout] is not capitalism. It is the opposite of capitalism.” –Sen. Jim DeMint

“Much of that mess [in the financial markets] is due to the very people we are now turning to for solutions – members of Congress. Past Congresses created the hybrid financial institutions known as Fannie Mae and Freddie Mac, private institutions with government backing and political influence. About half of the mortgages in this country are backed by these two institutions. Such institutions – exempt from laws that apply to other financial institutions and backed by the implicit promise of government support with the taxpayers’ money – are an open invitation to risky behavior. When these risks blew up in their faces, Fannie Mae and Freddie Mac were taken over by the government, costing the taxpayers billions of dollars. For years the Wall Street Journal has been warning that Fannie Mae and Freddie Mac were taking reckless chances but liberal Democrats especially have pooh-poohed the dangers. Back in 2002, the Wall Street Journal said: ‘The time for the political system to focus on Fannie and Fred isn’t when we have a housing crisis; by then it will be too late.’ The hybrid public-and-private nature of these financial giants amounts to ‘privatizing profit and socializing risk,’ since taxpayers get stuck with the tab when high-risk finances don’t work out. … Both Fannie Mae and Freddie Mac have been generous in their contributions to politicians’ political campaigns, so it is perhaps not surprising that politicians have been generous to them. This is certainly part of ‘the mess in Washington’ that Barack Obama talks about. But don’t expect him to clean it up. Franklin Raines, who made mega-millions for himself while mismanaging Fannie Mae into a financial disaster, is one of Obama’s advisers.” –Thomas Sowell

“The roots of this crisis go back to the Carter administration. That was when government officials, egged on by left-wing activists, began accusing mortgage lenders of racism and ‘redlining’ because urban blacks were being denied mortgages at a higher rate than suburban whites. The pressure to make more loans to minorities (read: to borrowers with weak credit histories) became relentless. In 1977 Congress passed the Community Reinvestment Act, empowering regulators to punish banks that failed to "meet the credit needs” of ‘low-income, minority, and distressed neighborhoods.’ In 1995, under President Clinton, the law was made even more stringent. Lenders responded by loosening their underwriting standards and making increasingly shoddy loans… . All this was justified as a means of increasing homeownership among minorities and the poor. Affirmative-action policies trumped sound business practices.“ –Jeff Jacoby

"The Community Reinvestment Act was pushed hard by Bill Clinton, although it originated under Jimmy Carter… . As you can imagine, wonderful things happen when the government strong arms corporations as to how they should spend their money and, better yet, how they should assess the qualifications of home buyers. So the country’s biggest buyers of mortgages were pressured into lowering the qualifications of applicants, in order to increase the percentage of poor that got mortgages. By 2006, 30% of all mortgages went to people who in any other circumstances wouldn’t qualify. … The best thing that can emerge from the current financial crisis is the realization that the government needs to stop directing economic decision making. In a sense, the government is putting out a fire it started when it both created the CRA and assessed lending institutions by how well they were doing in response to the program. When Clinton decided, in his usual arrogance, that he knew better than the market how banks should lend money, the seeds were sown for the current financial disaster.” –Former House Majority Leader Dick Armey

“Sometimes bipartisanship is grounds for celebration, but more often it is cause for tears. Last week, congressional leaders from both parties went into a room to hammer out a plan that would put taxpayers on the hook for $700 billion. But they assert that the investment is essential to the health of the economy. And they insist that if we make this investment, we’ll get all or most of it back. This promise would be more believable if the federal government had a long record of using tax dollars responsibly. In fact, it’s the equivalent of the guy who raids his kid’s piggy bank to feed the slots. The most notable impulse of our leaders is spending money the Treasury doesn’t have, piling up bills that future Americans will have to cover.” – Steve Chapman

“Under [Bill] Clinton, the entire federal government put massive pressure on banks to grant more mortgages to the poor and minorities. Clinton’s secretary of Housing and Urban Development, Andrew Cuomo, investigated Fannie Mae for racial discrimination and proposed that 50 percent of Fannie Mae’s and Freddie Mac’s portfolio be made up of loans to low- to moderate-income borrowers by the year 2001. Instead of looking at ‘outdated criteria,’ such as the mortgage applicant’s credit history and ability to make a down payment, banks were encouraged to consider nontraditional measures of credit-worthiness, such as having a good jump shot or having a missing child named ‘Caylee.’ Threatening lawsuits, Clinton’s Federal Reserve demanded that banks treat welfare payments and unemployment benefits as valid income sources to qualify for a mortgage. That isn’t a joke – it’s a fact. … In 1999, liberals were bragging about extending affirmative action to the financial sector. Los Angeles Times reporter Ron Brownstein hailed the Clinton administration’s affirmative action lending policies as one of the ‘hidden success stories’ of the Clinton administration, saying that ‘black and Latino homeownership has surged to the highest level ever recorded.’ Meanwhile, economists were screaming from the rooftops that the Democrats were forcing mortgage lenders to issue loans that would fail the moment the housing market slowed and deadbeat borrowers couldn’t get out of their loans by selling their houses. A decade later, the housing bubble burst and, as predicted, food-stamp-backed mortgages collapsed. Democrats set an affirmative action time-bomb and now it’s gone off.” –>Ann Coulter

“[T]he World Economic Forum has ranked the United States as the world’s most competitive economy for the last two years. … Its statistics show that per-capita gross domestic product in the U.S. consistently has grown faster than in other developed economies since 1980. Looking deeper at the causes of American competitiveness shows that we score especially strongly not only in domestic market size (No. 1 in the world) but also in such areas as time required to start a business (No. 3), venture capital availability (No. 1), the cost of firing an employee (No. 1), ownership of personal computers (No. 2), university/industry research collaboration (No. 1) and quality of scientific research institutions (No. 2). The availability of venture capital might be affected temporarily by the market turmoil, and we should worry if Democrats gain control of both ends of Pennsylvania Avenue in November because they might exacerbate what the survey found to be the two most ‘problematic’ issues for doing business in the U.S. – high tax rates and cumbersome tax regulations. But whatever happens in the next few months, most of the other advantages that have been powering the U.S. economy forward for decades will remain unchanged.” –Max Boot

“(W)hat if the bailout, as originally proposed and in its latest incarnation, would spend $700 billion of taxpayers’ money and actually make the economy worse? Believe it or not, there is good evidence this may happen. The inflationary prospects of the bailout price tag may lead to spikes in oil and crop prices that could hit ordinary Americans in their cars and on their kitchen tables. And government purchases of financial assets could ironically further constrain credit through causing write-downs on even the balance sheets of financial firms not participating in the bailout by worsening the effects of mark-to-market accounting rules.” –John Berlau of the Competitive Enterprise Institute

“This unconscionable ($700 billion bailout) scheme forces the vast majority of taxpayers who were honest and prudent to bail out firms that made bad business decisions. Furthermore, it does nothing to address the root causes of today’s market difficulties. The long-term effects of this fiasco, including inflation, a weaker dollar, and an even more precarious federal balance sheet, are almost certain to outweigh the shallow short-term stabilization of moneyed interests who have been twisting arms on both ends of Pennsylvania Avenue. … Congress helped to create this debacle with the Community Reinvestment Act, poor tax policies, hastily designed mark-to-market regulations, and spectacular negligence with regard to the systemic risks posed by Fannie Mae and Freddie Mac. Instead of addressing those core problems, this disgraceful plan snatches $700 billion from the pockets of hard-working Americans who largely had no part in this horrific play.” –National Taxpayers Union

“Even House leaders admit the bill is far too interventionist for their tastes. Minority Leader John Boehner called the $700 billion plan a ‘crap sandwich’ during a closed-door caucus of his members last night as he exhorted them to vote for the bailout bill if their ‘conscience’ would allow it. Paul Ryan, ranking member on the House Budget Committee, told his colleagues it ‘sucks’ even as he said he would reluctantly vote for it. But some members simply couldn’t stomach the prospect of voting for such a bill. ‘I didn’t get elected to turn this country into France,’ one member told me. He added that the predictions of financial doom by Congressional and administration leaders have been overplayed: ‘They shouldn’t have said the sky will fall tomorrow every day. It didn’t,’ he said.” –John Fund

“The Bush Administration has now provided three case studies in arrogance, isolation, and destructiveness: Michael Brown during Hurricane Katrina, Ambassador Jerry Bremer in Baghdad, and Secretary Paulson at Treasury. It is a tragic and very expensive legacy. No conservative and no Republican should doubt how much it has hurt our cause and our party.” –Former House Speaker Newt Gingrich

“I am worried for our country - not so much because of the tumult in the financial markets but because of the federal government’s response and its implications. After Hurricane Katrina, the federal government assumed roles traditionally handled by state and local governments. After the Sept. 11, 2001, attacks, the government federalized 25,000 workers through the Transportation Security Administration. The example of security-focused countries such as Israel, which elects to have that function handled by the private sector, did not matter. Now, our federal government is likely to commit three-quarters of a trillion dollars – more than last year’s Pentagon budget – to a bailout based on what happened in the credit markets last week.” –South Carolina Gov. Mark Sanford

“Every Republican who voted against the Emergency Economic Stabilization Act on Monday believes that Congress must address this crisis. They take it seriously and stand ready to vote for reasonable legislation. They were unwilling to give Treasury Secretary Henry Paulson a blank check. The sky is not falling. The market will return. Secretary Paulson is getting a lesson in civics.” –Rep. John Shadegg

“Nothing could more painfully demonstrate what is wrong with Congress than the current financial crisis. Among the Congressional ‘leaders’ invited to the White House to devise a bailout ‘solution’ are the very people who have for years created the risks that have now come home to roost. Five years ago, Barney Frank vouched for the ‘soundness’ of Fannie Mae and Freddie Mac, and said ‘I do not see’ any ‘possibility of serious financial losses to the treasury.’” –Thomas Sowell

“Forget back-door socialism: this was right through the front door. The consequences (of the $700 billion bailout) would have been dreadful and very scary. It was to be the first of many bailouts, since of course it cannot and would not work. Bad debts can’t be made good by legislation. This means that more money would be necessary, as the middle class was sucked dry by the vampire state for years to come.” –Llewellyn Rockwell

“Conservative radio host Mark Levin fired back at Bill O'Reilly Thursday evening after O'Reilly delivered a blistering diatribe on his own radio program earlier in the day, attacking conservative talk radio hosts for opposing a $700 billion bailout for the financial industry and calling them ‘idiots,’ ‘charlatans,’ and ‘right-wing liars.’ ‘What a buffoon,’ Levin said of O'Reilly, host of Fox News’ ‘The O'Reilly Factor.’” –CNS News

“A final thought: Once voters are done being mad at Wall Street, maybe they should direct some rage at a few million mortgage borrowers in four or five booming states who bet on rising house prices using subprime loans and then stuck the rest of us with the losses when prices fell.” –Holman W. Jenkins

“Meanwhile, the press continues to treat the inexperienced and gaffe-prone Sen. Barack Obama as though he is the next JFK. Among the howlers is the presumption that he is an orator of great gifts as JFK was an orator of great gifts. In truth, the Prophet Obama suffers one of the strangest oratorical disabilities I ever have seen in a presidential candidate: a dependence on the teleprompter. We know of politicians who depend on the teleprompter for fluency. Sen. Obama, however, relies on a teleprompter so that he will not be heard talking down to the electorate. If he is not lecturing with his nose in the air, he is all uhhs and ahhs. Perhaps if he had served as mayor in a small town, he would have gotten over this revealing disorder.” –Emmett Tyrrell

In summary: “We’ve had enough of sideline kibitzers telling us the system which they themselves have thrown out of sync with their social tinkering can be improved or saved if we’ll only have more of that tinkering or even government planning and management. They play fast and loose with a system that for 200 years made us the light of the world. … It’s time we recognized that the system, no matter what our problems are, has never failed us once. Every time we have failed the system, usually by lacking faith in it, usually by saying we have to change and do something else. … A Supreme Court Justice has said the time has come, indeed is long overdue, for the wisdom, ingenuity, and resources of American business to be marshaled against those who would destroy it.” –Ronald Reagan

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