Not Depressed Yet

Gary S. Becker, a senior fellow of the Hoover Institution think-tank, discusses the bail-out in today's Wall Street Journal:

The moral-hazard consequences for banks receiving a bailout now is worrisome since they may expect to get rescued again by the government if their future investments turn sour. Yet while I find helping these banks highly distasteful, moral-hazard concerns should be temporarily relaxed when the whole short-term credit system is close to collapse. Still, the bank bill with its huge bailout does suggest that the $29 billion bailout of the bondholders of Bear Stearns in March was a mistake. It seemed to have a moral-hazard effect by encouraging Lehman Brothers and other investment banks to delay in raising more capital because they too might have expected the government to come to their rescue if times got much worse. Although the government was apparently concerned that foreign central banks were major holders of the bonds, it was unwise to give them and other bondholders such full protection.

"Unwise..." Ya think?

Still, a few reforms seem reasonably likely to reduce the probability of future financial crises.

- Increase capital requirements. The capital requirements of banks relative to assets should be increased after the crisis is over in order to prevent the highly leveraged ratios of assets to capital in financial institutions during the past several years. Possibly a minimum ratio of capital to assets should be imposed by the Fed on investment banks and money funds. As much as possible, the measure of capital should not be its book value but its market value, such as the market value of publicly traded shares of banks. Book value measures, for example, apparently badly missed the plight of Japanese banks during their decade-long banking crisis of the 1990s.

- Sell Freddie and Fannie. The government should as quickly as possible sell Freddie Mac and Fannie Mae to fully private companies that receive no government insurance or other help. These two giants did not cause the housing mess, but in recent years they surely greatly contributed to it, partly through congressional pressure on them to increase their purchases of subprime loans. They have owned or guaranteed almost half of the $12 trillion in outstanding mortgages while having a small capital base. The housing market already has excessive amounts of government subsidies, such as from the tax exemption of interest on mortgages, and should not have government sponsored enterprises that insure mortgage-backed securities.

- No more bailouts. The "too big to fail" approach to banks and other companies should be abandoned as new long-term financial policies are developed. Such an approach is inconsistent with a free-market economy. It also has caused dubious company bailouts in the past, such as the large government loan years ago to Chrysler, a company that remained weak and should have been allowed to go into bankruptcy. All the American auto companies have asked for and received handouts too since they cannot compete against Japanese, Korean and German car makers, partly because these American companies have been incredibly badly managed. A "too many institutions in trouble to fail principle," as in the present financial crisis, may still be necessary on rare occasions, but failure of badly run large financial and other companies is healthy and indeed necessary for the survival of a robust free-enterprise competitive system.

While I disagree with the principle behind the bail-out, (using taxpayer money to save companies who made bad investments), I can also understand that our lovely politicians drove us into this financial landfill in the first place, primarily through sustained practice of idiotic social engineering ideas. That means, unfortunately, that something must be done. And as is always the case when "Something Must Be Done," the little guys take it in the shorts -- that'd be you and me, in case you had any doubts.

This all comes down to greed and stupidity. If I thought that some real consequences for the capering fools in Congress would come out of this, I'd be less hostile toward the idea. A credit crisis and falling stocks are good for no one, especially with the current huge investment of private retirement funds in 401K plans. I suppose that more than anything, it makes me -- and most other average citizens -- so angry I could strangle someone. That not being a realistic option, I find that the only outlet for my ire is emotional venting against greedy, stupid corporate executives and greedier, even stupider politicians.

So what else is new.