E!! The True Conservative Story™

I highly recommend this long but excellent piece, “Wall Street Lays Another Egg,” by Niall Ferguson in Vanity Fair. You’ll be smarter if you read even half.

Hat Tip: Ralph Hancock on the Postmodern Conservative blog @ Culture11

Victor Davis Hanson is always worth the read.  Today’s column is on the basic lessons we can learn from the financial mess.

An excerpt:

The new national gospel became charge now/pay later and speculate, rather than put something away in case of a downturn. To provide more goodies that we hadn’t earned, politicians ignored soaring annual budget deficits and staggering national debt and kept spending.

The lessons:

First, cash really is king. For all the talk of a trillion here or billions there, when the crunch came, many of these investment houses and their once-strutting managers found themselves with a minus net worth. They were desperate to find liquidity — any money anywhere they could find it. Pedestrian passbook savings accounts proved wiser investments than all the clever hedge funds, derivatives, and sub-prime schemes put together.

And:

Second, wisdom and blue-chip college educations are not quite the same thing. The fools in Washington and New York who blew up Wall Street had degrees from our finest professional schools.

And:

Third, we as a nation need to relearn the old notion of shame — as in “shame on you!” Firms like Lehman Brothers and Bear Stearns were once responsible Wall Street institutions, built up over decades by sober men. But their far-lesser successors in just a few months have bankrupted these venerable brokerage houses — with seemingly no shame at what they have done to the image of Wall Street.

Americans used to pay their debts. Somewhere in all the blame-gaming about the crooks and liars in New York and Washington, we never hear that real people borrowed real money that they should not have. And they then defaulted on what they owed to others. Walking away from debts may have been understandable, but it was also a violation of trust — and wrong.

I’m borrowing my post header from P.J. O’Rourke.  (VERY funny book if you have never enjoyed it.)

I do wish names would be Named, no matter the party affiliation:  who started and voted for all of the federal legislation, who harassed the lenders to conform, which lenders not only conformed but went above and beyond the call, and who made big bucks.

It won’t happen, of course, because they are all in bed together to some degree.

As Anne of Idaho quipped, “Someone needs to go to Washington and Wall Street and close down the whorehouses.”

I’m reading accounts that Senator Chris Dodd’s weighty remarks and swelling ego nearly crushed a few innocent bystanders this morning as he bemoaned the Wall Street greed that got us into this mess.

The Chairman of the Senate Banking Committee uttered not one peep, though, re: his acceptance of $165K in contributions from failing Fannie and Freddie (presumably as payback for his opposition to properly overseeing and regulating them).

No mention either, that he benefitted from VIP insider discounted loans from the (now defunct) Countrywide Financial.

I had the honor of meeting and assisting Pat Toomey last week at the Conservative Leadership Conference here in Las Vegas.  This morning, Club for Growth says/releases the following (excerpted):

Eighteen months into the credit crunch, many largely capitalized financial services firms are experiencing serious difficulties but the overall economy continues to grow.  GDP growth over the past 12 months was 2.25 percent and 3.5 percent when excluding the drag imposed by the housing sector.  Even within the financial sector, many banks are doing well.  Regional bank indices had risen significantly since the lows of last July—prior to the bailout announcement—and thousands of community banks are thriving.  It is extraordinary that a massive government intervention in the economy is considered inevitable when the economy is not even in a recession.

Indeed it is.  On what is the panic of Wall Street types based?  Could it be fear that lack of liquidity and credit in the market will affect their own bank accounts?

At the same time, socializing economic risks come at a great cost to the American economy by misallocating capital, inviting political manipulation, and putting taxpayers on the hook for possibly a trillion dollars.  Such a large takeover by the government will surely be accompanied by adverse, unintended consequences.  Already, other companies and industries are lining up at government’s door asking for their own bailout.  And if the government incurs $700 billion in debt to finance the purchase of bad bank assets, the danger that it will eventually monetize that debt and trigger dramatic inflation is very worrisome.

“Unintended consequences.”  This concept is one of the great underlying tenets of conservative thought.  The idea is that when one makes broad, sweeping changes there are always unplanned effects, and they are often worse than the problem with which you began.

Our Do Nothing Congress should, in this case, do nothing (other than what Newt said yesterday).  We ought to free things up where we can, allow the market to self-correct, and let those who must (and should) take their proverbial Lumps. 

Access to unlimited cash and credit is not a “human right,” and we should stop behaving as if it is.

Since hearing word of widespread support (Paulson, Congress and the President) for the latest, greatest Bailout I’ve been feeling increasingly dejected.  And concerned.  And angry.

Treasury Secretary Henry Paulson has a “plan” which will “shift” $700 billion in obligations from private companies to the American taxpayer.  Apparently he sees this as the only Way and has 9,000 wizards on stand-by to make it so.  (The same Wall Street wizards that got us into this mess, no doubt?)

And evidently most members of Congress are spellbound and preparing to waft more money New York’s way.

One can only imagine what Banking Committee Chairman Chris Dodd (the largest beneficiary of political funds from Fannie & Freddie) will dream up as he joins hands and sings Tra La La La La with Reid and Pelosi.  I’m not sure how it ends, but I’m pretty sure the working title is Nightmare on Wall Street and that we are barely ten minutes in.

Setting the typically wrong-headed Paulson aside for a moment, how is it that Bush and Congress care so little about protecting the American taxpayer?

And why all the insistence on a quick solution?  This mess was not created in a week, yet Paulson and our illustrious Congressional geniuses think they can solve it by this Thursday?  Does it not occur to anyone that we need to take a deep breath, wade in, and calmly and pragmatically work our way through our many economic and financial problems in a careful and measured manner?

As Newt blogged today (thank God for Mr. Gingrich), between the crisis of liquidity on Wall Street, the crisis of bad energy policy that transfers $700 billion a year to foreign nations, the crisis of Sarbanes-Oxley that cripples entrepreneurs/start ups and drives banks and businesses from New York to London, and the crisis of a high corporate tax rate…we are in some very deep Doo Doo.

Newt proposes a ”non-bureaucratic solution that would stop the liquidity crisis almost overnight and do it using private capital rather than taxpayer money.”  He suggests four reforms that would do the trick without the bureaucracy and additional tax burden.  I suggest you read his blog post as it is well worth the time, but in summation they are:

#1  Stop the mark-to-market rule which is forcing companies into unnecessary bankruptcy. If short selling can be suspended on 799 stocks, the mark-to-market rule can be suspended for six months and then replaced with a more accurate three year rolling average mark-to-market. 

#2  Repeal Sarbanes-Oxley. It failed with Freddy, Fannie, Bear Stearns, Lehman Brothers, and AIG. It is crippling our entrepreneurial economy. One San Jose firm told Newt they would bring more than 20 companies public in the next year if the law was repealed. It’s Sarbanes-Oxley’s $3 million per startup annual accounting fee that is keeping these companies private.

#3  Go to a zero capital gains tax like China and Singapore.  Private capital will flood into Wall Street (at no cost to Joe Taxpayer) and lead to an increase in federal revenue through a larger, more prosperous economy.

#4  Pass an “all of the above” energy plan designed to bring home $500 billion of the $700 billion a year we are sending overseas. With that much energy income, our economy would boom.

E!! endorses these proposals (a fact I’m sure Newt is happy to hear) and strongly advises against implementation of the Paulson plan which by all reasoned accounts is going to be a total Mess.

In closing, I’ll be waiting to see what McCain says and does about all this.  If he doesn’t reject the Paulson/Bush/Congressional plan and closely align himself with much of what Newt said here, I may not be able to vote for him after all.

(Note:  To those who have heard me joke that I am going to “get drunk and vote for McCain,” consider this my semi-official back-peddle…pending the outcome of this mess and McCain’s stand on things.  Let’s see how Maverick-y the self-proclaimed maverick is when it really counts.) 

With the takeover of AIG, the federal government has wangled its fourth major bailout and taken control of its very first insurance company.  

Both McCain and Obama have called the bailouts of AIG, Fannie Mae, Freddie Mac, and Bear Stearns “necessary measures.” McCain blames greedy Wall Street tycoons while Obama blames failed GOP policies.
 
Most sensible folks agree that the government’s implicit guarantee to Fannie Mae and Freddie Mac were a license to lenders to run rampant.  Fannie and Freddie were able to buy bundles of home mortgages and/or mortgage-backed securities in massive quantities without contemplation of the financial risks.

  
Some economists blame the regulators/regulations.  I disagree.  The financial industry is heavily regulated.  It was the government’s guarantee of Fannie and Freddie that emboldened lenders to put together dicey loans and encouraged undisciplined financial endeavors.

Government policy laid the foundation of the mortgage crisis more than three decades ago when Congress passed the Community Reinvestment Act of 1977. The law forced banks to loan money to low-income borrowers in order to meet the “needs” of the local community.

No worries, though.  The banks knew they could sell off those loans to Fannie or Freddie, and F & F knew they could buy those loans with little regard for the risk.

I’m reminded of the past weekend here in Las Vegas when a few enthusiastic friends (first time visitors) went out and hit the blackjack tables. 

A young man playing two hands was dealt four sevens.  A friend advised him to split and play four hands.  Pondering the risks, he hesitated – but the helpful friend offered to cover his losses and let him keep all the chips if he won. 

What do you suppose that young man did?

He behaved as anyone would:  he played all four sevens.  And, unfortunately, lost on all.

So it goes on the tables of Sin City.  So too, in Congressional corridors and bank board rooms.