Government Bailouts: What's it All About?

Global stock markets are in summer free-fall; the stocks and bonds of financial institutions are sinking more quickly than the Titanic; and sentiment is veering into panic territory. We have, of course, been here before, not necessarily exactly here, but close enough. In 1990-1991, banks also went into a tailspin, and before that there was the S&L crisis, and before that, the massive failures of the early 1930s, and then back into the regular bank panics and financial collapses that were endemic to the U.S. financial system for much of our history.

The prime question then and now remains the same: what precisely is the role and responsibility of the government to do something about all this? The tension of the free-market on the one hand and the responsibility of government on the other, the needs of the many versus the needs of the few, have never been resolved. While Washington and Main Street and Wall Street just now are in heated discussions and argument about what to do with the GSEs (the government sponsored entities known as Fannie Mae and Freddie Mac), underneath the policy plans is that unresolved issue of just how much government should do.

Some, and usually conservative, highlight the "moral hazard" problem: bail people out and the negative consequences of bad decisions are never born, which in turn facilitates bad behavior as surely as giving an alcoholic a drink. That was the crux of the debate over what happened with Bear Stearns in March of this year. On the other side, and usually liberals, are those who say that one of the primary roles of government is to step in when the free-market fails or when it manifestly allocates finite resources in such an unequal fashion that it creates both injustice and rifts in the precious social fabric that supposedly holds us together.

The technical questions surrounding the GSEs are real, and do need addressing even in the absence of explicitly dealing with the larger issues behind them. At stake are actual mortgages, actual credit creation, and the daily functioning of a vital aspect of the credit and financial system. No doubt something will be done to prevent their total collapse, although equity holders are likely to lose all of their money. But in crisis mode, government simply reacts, and there is no sign just now of a systemic consideration of the balance between government as a backstop or watchdog and the unfettered free market. We know that the unfettered free-market is a myth, but it holds a certain rhetorical appeal to many.

There are rumblings of a next wave of reforms that will adjust government institutions to deal with the new world of capital flows, derivatives, and contracts, as well as the unintended consequences of securitization. But little is being discussed about the ultimate goals, and there is little sign of the type of "first principles" debate that animated the creation of the Constitution, the establishment of the first central bank, the reforms of the New Deal, or even the underpinnings of the Reagan legislative agenda.

Government has a responsibility to provide for security, and economic security is surely a vital need, though usually a tad less acute than physical security. The past eight years have seen the entire public debate consumed with national security defined in military and police terms. Now, we are seeing that another dimension -- economic security -- has been almost completely ignored. Bailing out or not bailing out Fannie and Freddie is an important decision -- but it is tactical. In the upcoming fall election, let's hope both candidates turn more aggressively to the principles, without with there can be no good policies. Obama articulated a vision of government in the spring, and that is precisely what we will need to address these systemic issues in the years ahead.

Comments

[leftLibertarian]

A 'free market' has not existed in the US since at least the time of Alexander Hamilton.

[nezumi]

I agree, that was what made the free market philosophy propaganda. It is readily invoked to get others to make room at the feeding trough but when you reached it yourself you quickly fend of others. A true free market is generally not in the interest of the entrepreneur. It would be suicide. You just don't jump into a pool of sharks to see if you are the strongest one. You make sure there are no other sharks.
So while all chant 'free markets' everybody with the intend to make money scrambles to find a niche and avoid it like pestilence.

[WASanford]

As I see it, government has only one legimate interest; the welfare of its citizens. It should direct its resources to the promotion and protection of its citizen"s welfare. Government gains or loses its legitimacy to the extent that it does that. The form of the government isn"t what matters. It can either be a republic or a socialistic state as long as it attends to the welfare of all of its citizens, it gains its legitimacy. How long has it been since we had that kind of government, if we ever have?

Do you believe a legimate government would find it desirable or necessary to impinge on the civil rights of its citizens or to weigh its taxation in favor of a relatively few of its citizens? Would it unnecessarily begin a war to favor one of its industries? Would it look away as its citizens were being exploited?

And, what moron decided that this country could put most of the nation"s wealth and capital in the hands of a very few and still have a viable economy? Just how is that supposed to work?

[Henry]

Agree with you. But let me take a technical point with your republic or socialist. Republic is a form of governmtent. see http://en.wikipedia.org/wiki/Republic

Socialist has nothing to do with form of government. I know, you oft times hear of European Parliamentary systems as having a "Socialist" government. But... this is kind of like the Cleveland Indians being Indians. (there are no Indians on the Cleveland Indians). Socialism has to do with capitalism(the opposite of). Capitalism all goods private, Socialism all goods social e.g. social health care, university education etc etc. A Socialist Government in a European Parliamentary system is when the Socialist Party (like Republican Party) wins the election and puts together a coalition government, like in Great Brit.... the Labor Government is the coalition of the Labor Party who then runs the show..

[swift goat pet for truth]

I disagree.

The Fed government should maintain a rule of law.
The Fed government should invest in the infrastructure of the country.
(infrastructure would include transportation, communication, civil peace, justice and equality for all, universal education and UNIVERSAL HEALTH CARE)

If this is done, the welfare of citizens will take care of itself.

[WASanford]

First of all, thank you and Henry for reading my comment and responding to it.

But Look around you. How well is that working out? And who do you think is going to end up bailing the crooks out? When it comes to socialism they're all for using it to save their asses but not at all for helping the rest of us. Universal health care isn't infrastructure, it's socialism! It's socialism that works in every industrialized nation except ours. We should consider access to health care a right not a privilege.

No one needs a million dollars a year. No one should be allowed to receive that much as salary as long as one American citizen is sleeping under a bridge and dumpster diving for aluminum cans to get money for food That's just the beginning of the exploitation of its citizens that our government turns its back on.
Don't even get me started on our lack of support for public education.

And let me repeat my question. What moron decided that we could allow a precious few to possess the major portion of this nation's wealth and capital and still have a viable economy?

[swift goat pet for truth]

Its about socialize costs and privatize profits.

[uhappytoo]

I am happy to see in print that the rhetoric of an unfettered free market is a myth. Yet the media are among the most virulent in keeping the myth alive.

Today's problem stems primarily from those, mostly Republican, who have sold us on the idea that we are mere consumers rather than citizens. Should we be able to reverse that silly notion, perhaps the ills that are among us will fall aside as the citizenry take to making real changes to accord us all a better society. We are citizens first. If only we can remember to think that way before we tumble into even darker days; those that ultimately lead to outright repression.

[NCGigi]

Look, this is the fruit of the tree of letting the Republicans have their way. Republicans have controlled all three branches of government until the past year when Democrats got a bare majority in the legislative branch. Let this experiment play itself out; let the economy crash, just like it did when the Republicans were in control in 1929, and let the Republicans admit that their theories on economics have been proven false. This is a tough tough lesson, but one we /USA needs to learn again. We/USA have tried it their way. It does not work. Repeat as necessary. We tried it their way. It does not work.

[Sundialsvc4]

Stop and think: where does that "magical guv'mint money" come from? Right... it comes out of thin air.

Socialism doesn't work. The government of any country is not an unlimited spigot from which money flows, yet by various means and disguises our own nation has become utterly dependent on it ...

Perhaps THAT is a root-cause of the problem.

You can't "manufacture" real wealth. You can't "borrow" what you do not have the means to repay except by more "borrowing." This strategy is a fairly-recent phenomenon and our economics have become more and more unstable as it has continued.

[Henry]

The interstate highway system is socialism. Dwight D Eisenhower was the man. The interstate is one of many things that has contributed to the greatness of this country.
Now Devious George and Dead-eye Dick could "privitize" the Interstate and attain possibly $2 trillion for it. They could use this $2 trillion to pay down the debt. Sound like a good idea to you?

Imagine for a second...Slick Willie was president. The budget was balanced. There was professional and government discussion of paying off all of the debt. There would be no more Treasury debt! What then would all of these central banks of Asia and Russia invest in for reserves? (the $2 trillion or so) And where would that leave the trade deficits? You should look at this debt the way the big boys do... as assets! Thats what they really are. And imagine how much they "take" on these assets. You may have missed the forest for the trees here.

[alto]

I can't agree with your statement "underneath the policy plans is that unresolved issue of just how much government should do." This issue has been resolved since Reagan. Regulation is Bad and Bailouts are Good. It's true that taxpayers haven't been properly represented in the development of the policy (our fault for voting Republican), but the policy is clearly shown by government action/inaction. I understand your point that the time is right for public debate, so maybe we can start reversing the damage done in the last 30 years.

[WASanford]

I think that what you're describing here is the privatization of profits and the socializing of debts.

[girlwild]

It's called transfer of wealth coupled with corporate welfare.

[GPRogueCowboy]

Now that all of the $165 Billion Taxpayer Bailout of the Economy has reached the last Taxpayer, Small Businesses and Large Businesses. Where are all the Charts and Graphs showing how SUCCESSFULL the ECONOMIC STIMULUS PACKAGE has been??
After all our Grand Kids and their Grand Kids will be paying for it for many years.

[Torus34]

Why worry about Freddy Mac and Fannie Mae at all? Didn't Treasury Secretary Paulson just get through telling us that they are in good, sound financial shape? Don't you believe him? After all, he's a member of the Bush Administration. And we all know that the Administration's word is to be believed. Right? Right?

[Cathexis]

Ouch! :-D

[chucktrotter]

Don't blame Bush for this mess. He's not intellectual enough to pull-off this scam. Blame Gram and his cronies. Remember that the politicians on various committees drink from the same trough...K Street and Wall Street. There "are" times when the fascists don't want to drown the baby in the bath tub. When the speculators and hedge fund crowd gets in trouble, government is good. Common people do time for snitching a six pack from a Seven-Eleven. What's going to happen to the brokers, lenders and profiteers involved in this fiasco? Nothing. Just like McCain and his S&L criminal activities...NOTHING! But, rest assured, we the little guys will write the check for the bail-out!

[research]

offer folks who are having trouble paying their mortgages some of those nice low rate loans they want to give Fanny. Roll back ARM rates.

[WASanford]

And if you also make the real estate crooks eat the depression of the property they sold, I'm all for that!

[LOL123]

Bush has demolished all the safe guards put in place starting with the constitution on to regulations that safegard maipulation of securites prices in commercial banks, investment banks and Government sponsored enterprises. We don't need reforms, we need the regulations and checks and balances that were in place and totally disgarded by this administration. It's been a free for all white collar crime lab out there and the PEOPLE that help prop up the government be it sons/daughters in Iraq, blue collar workers who do the dirty work and young people entering the work force paying taxes in return for cheap labor get to pay the consequences of bad decisions made FOR them because this president does whatever the hell he wants without regard to long range outcomes...short term (8years) is sufficent to grab all the money you can and leave the rest of us holding the empty bag. If he thinks we're pissed now just wait.