I’ve been posting up a storm on the financial crisis that’s prompted a proposal for a whopping $700 billion intervention (or more) over at my place for the last week or so but I thought I’d post a few random observations here at least partially in reaction to Maniakes’s post.
First, the politics. This is a bipartisan problem and any attempt to make it anything else is, at the very least, poorly informed and, more likely, intellectually dishonest and deceitful.  For Democrats the notion that this is simply another instance of Republican mis/malfeasance doesn’t meet the smell test. As Megan McArdle put it
But if you are looking to place regulatory blame, whatever changes you’d care to point to happened on Clinton’s watch, not Bush’s. You cannot have it both ways–hailing the Clinton genius at economic management (and implying that Obama will bring back those halcyon days), and then claiming that Bush should have trailed around undoing all his work. You most certainly cannot explicitly claim, as Obama did in his speech, that this crisis is the result of the Bush administration’s deregulation of the financial markets
Republicans should abandon any notion that they can escape blame for the problems. It occurred on President Bush’s watch and Republicans haven’t exactly been clamoring for a sharp revision in how the financial sector is regulated for the last eight years. Where were the complaints about moral hazard when it might have actually done some good? Let’s face it.  Politicians on both sides of the aisle have been raking it in with both hands from Fannie Mae, Freddie Mac, and the big investment banks. Nearly everybody’s hands are dirty and arguments about who is the most dirty aren’t particularly impressive.
Any conceivable American government was going to intervene under the present circumstances—Democratic, Republican, market-oriented, technocratic, whatever. Was nothing learned from “It’s the economy, stupidâ€? The message was that the Administration must convincingly give the appearance of doing something about economic turndowns even if action is counterproductive and the business cycle will do the heavy lifting.
As a brief digression I’ve seen quite a bit of chortling about the prospect of a conservative taking steps as apparently socialistic as the Bush Administration seems to be proporing. If Republicans are under the misapprehension that GWB is a fiscal conservative they’re as deluded as some Democrats were who thought that Bill Clinton was a liberal. What’s the evidence thatPresident Bush is a fiscal conservative? The quotas on steel imports? The multiple tax rebates? The unbalanced budgets?
Anyone who opposes taking the dramatic move proposed needs to make their case either on the grounds that the action is not needed or that it will be ineffective. There’s actually a case that the action is unnecessary. As the WSJ pointed out the other day, the crisis in the financial sector really hasn’t translated into problems in the general economy. Anybody who makes that case needs a pretty dispositive explanation for why that’s the case and why it’s not just a matter of time.
If you’re going to make the case that the plan will be ineffective, you’d better have some pretty solid evidence that’s the case and have a plan of your own that will definitely work. “Mights†and “maybes†won’t cut it nor will a plan consisting of graduated steps. Complaints about presidential inaction in the face of economic woes are a commonplace; administrations being punished for overreaching (with respect to the economy) are a rarity.
One more point and it’s in an area that I usually don’t delve into but I’ve seen some very over-the-top comments from left-leaning bloggers with what certainly appear to be calls for insurrection and responses from right-leaning blogs mostly of the “there the Stalinists go again†sort. A lot seems to hinge on what the phrase “total revolution†means and I think we’re owed an explanation.
I think the correct prescription is to take a deep breath. If there is any likelihood that the crisis in the financial sector will translate into problems with the economy, generally, then this is not the time for worries about moral hazard nor is it the time to punish those who got in over their heads in one way or another. There will be plenty of time for both when the crisis has passed.
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In other words:
Something must be done.
This is something.
Therefore, we must do it.
My argument is that before taking action, we need to weight the risk if we don’t take the action against the direct cost of taking the action and the indirect cost of the action leading to us landing in a similar mess ten years from now. The Bush/Paulson proposal strikes me as too costly on both fronts, and I’m far from convinced that we can’t avert the risk of financial collapse with a far lower cost (both dollars and moral hazard).
I’m also concerned about the implications of a broad policy of socializing losses and privatizing profits. Nobody thinks that’s a good situation. People are already starting to say that if losses are socialized, then profits and the decision making process that leads to those profits and losses must also be socialized to the same extent that losses are. There’s a fair amount of justice to that argument. Those of us who don’t want profits and the decision making process socialized must therefore oppose as much as possible the socializing of losses.
With that out of the way, I absolutely agree with you on most of your other points. The Hero Theory of Disaster is often tempting, but in situations like this there’s generally plenty of blame to go around. And if there is a risk of the crisis spilling over into the broader economy, then we do need to do something about it even if that means compromising our principles on moral hazard, and everyone who’s anywhere near the mainstream of the policial spectrum would be planning some form of government intervention if they were in power. Heck, I’m probably more libertarian than 80% of the population on fiscal issues, and I’ve been defending the ad hoc bailouts as necessary.
Your comment immediately above is a pretty fair summary of my view, Maniakes. Heck, I don’t even object to what I’ve been calling elsewhere a Congressional "auto da fe" but I think it should be done after we a) decide that something must be done (I think that’s a done deal); and b) do it.
 If there is any likelihood that the crisis in the financial sector will translate into problems with the economy, generally, then this is not the time for worries about moral hazard
This is the only point at which considering the moral hazard can make any difference. Once the deed is done, it’s too late.
I found this article very interesting:
http://www.nytimes.com/2008/09/23/business/worldbusiness/23euro.html?ref=business
Europe and Japan Balk at U.S. Request on Bank Aid
Nobody else seems to want to participate in the bailout. Pretty clearly they don’t think we are on the edge of a global financial crisis. Yet the lobbyists have already been busy, convincing Paulson to bail out non-US companies with US tax dollars, and bail out debt unrelated to mortgages.Â
My initial reaction to this was that we probably did have to do the bailout, but I am turining skeptical. The bailout, even if it calms the markets, may produce more economic pain for this country. Note the spike in oil prices and the drop in the dollar. The world markets are already worried about our debt levels, and now we are gonna try to bail out the world markets?
I think they ought to debate this thing for at least a couple of weeks. The reaction to this "crisis" may be potentially much more catastrophic than the crisis itself.Â
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