Paying the piper …

Excerpted from WSJ: “Bailing Out Ourselves – Bankers weren’t the only ones who enjoyed the credit mania”, October 2, 2008

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“If banks, in spite of every precaution, are sometimes betrayed into giving a false credit to the persons described, they more frequently enable honest and industrious men of small and perhaps of no capital to undertake and prosecute business with advantage to themselves and to the community.”

So wrote Alexander Hamilton in 1790, amid an earlier populist backlash against American bankers. Hamilton didn’t hesitate to use the powers of the Treasury to calm markets amid a speculative panic for the good of the larger community. The U.S. is at another Hamiltonian moment, if Congress has the nerve to act in the national interest.

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We are told this is a “bailout for Wall Street.” But if Americans are honest with themselves, they will admit that bankers are far from the only cause of our current predicament.

The U.S. is living through the aftermath of a classic credit mania, one that all of us enjoyed while it lasted. We don’t remember many protests when home prices were rising by 15% a year, or when interest rates stayed at 1% for a year and real interest rates were negative for far longer.

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Our point isn’t to absolve Wall Street or Washington — far from it. The point is that credit manias are by their very nature societal, which is why the panics that follow can do so much damage to Americans outside the financial arena. They are part of a larger psychology that sweeps everyone up in euphoria for a time, only to send everyone into a defensive crouch when the credit stops.

The challenge at such a moment is to prevent a panic from becoming a crash that does far more extensive damage. This is where we are now, and this is why the House should pass the bill that passed the Senate last night, even with its flaws. The government needs the power to use public capital to defend and stabilize the financial system. In that sense, we are really bailing out ourselves.

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Credit markets are ceasing to function by any normal standard, with banks refusing even to lend to one another, much less to credit-worthy borrowers on Main Street.

Yesterday, the Institute for Supply Management’s manufacturing index reported its largest one-month drop in 24 years. While at 43.5 the index remains above the recession level of 41, the credit vise may soon guarantee one.

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Fannie Mae and Freddie Mac … those two government-sponsored enterprises did so much to turbocharge the credit mania. By providing subsidized rates of return to global investors, they helped fuel the bubble in housing and mortgage-backed securities that is now haunting so many financial institutions.

The Bush Administration was on the right side of this debate for eight years, as was the late Clinton Treasury. This was a scandal in plain sight that all but a few ignored.

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The Paulson plan isn’t what we would have drawn up. It will not by itself inject capital into troubled banks, and it carries risks in how Treasury will price toxic assets when it buys them. But it is one more policy tool at a time when something needs to be done, and it is the only one currently up for a vote. Passing it won’t by itself revive the banking system, but defeating it will guarantee far more damage to far more Americans.

In this sense, too, the votes this week in Congress are about bailing out our political class from its own embarrassing performance. Americans are anxious, even frightened, about the financial system. They are looking for leaders who will act to defend it.

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Full article:

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Ken’s POV:

The bailout simply closes a loop.  The government ‘encouraged’ lower mortgage loan qualifying criteria with the Dem’s Community Reinvestment initiatives and Bush’e Ownership push.  Now, the government will be stuck holding the bad paper that it thought it was feisting off on the banks.  It would be poetic justice if the government weren’t playing with our money.

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