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Tuesday, September 30, 2008

The Bailout

It so happens that I am reading Russell Kirk's The Conservative Mind and I cannot get through more than a page or two without my mind being drawn back to the current financial crisis. In the book, Kirk details the history of conservative thought as it arose in reaction to the French Revolution. The reason that current events keep invading my reading is that the men and ideas described in the book have more to say on today's issues than all the chattering heads on cable and talk radio. This is primarily a consequence of the fact that they deal in ideas and rhetoric -not personality(though many of them had that as well). Last night I came across this by John Randolph of Roanoke:

I have said...that the people of this country, if ever they lose their liberties, will do it by sacrificing some great principle of government to temporary passion. There are certain great principles, which if they be not held inviolate, at all seasons, our liberty is gone. If we give them up, it is perfectly immaterial what is the character of our sovereign; whether he be King or President, elective or hereditary-it is perfectly immaterial what is his character-we shall be slaves-it is not an elective government which will preserve us.

Reading this stopped me in my tracks and left me to wonder, is that we are up against. Are we sacrificing some great principle to temporary passion and if so, will that leave us enslaved? Certainly the debate has been framed this way by some, mostly conservative republican, members of congress. But they are joined in their opposition by others, mostly liberal democrat. The democrat argument relies on the premise that Main St should not bail out Wall St. In this construction, the former represents the average American worker who does his job, pays his bills, etc.. While the latter represents everything that is wrong with capitalism, mainly a class of folks who only draw from the collective wealth without adding to it. This class is attacked as if they were the money-changers in the temple of America. This is an attack that works. See as evidence the massive outpouring of letters and calls to members of congress, letters to the editor, and doubtless thousands of blogposts decrying the whole bailout as welfare for the rich.

So in opposing the bailout, we would seem to be correct regardless of which approach we find more appealing. I have a fundamental mistrust of any arguments that invoke fairness (they are usually followed by a request to take something away from you and give it to someone else); but I would be comfortable casting my lot with Randolph and imagining my opposition demonstrates a deep commitment to principle.

So why am I so uneasy about denouncing the bailout?

In his column on realclearmarkets.com, economics writer Robert Samuelson sums it up nicely:

To Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke, this financial breakdown now threatens the real economy. Companies depend on bank borrowings and sales of commercial paper (in effect, short-term bonds) to conduct everyday business -- to buy inventories, to pay suppliers and workers before cash arrives from sales. Credit markets were freezing, Paulson and Bernanke decided. Panicky investors were shifting from commercial paper to Treasury bills; banks weren't lending to each other. If it continued, consumers and firms wouldn't get essential credit.


If you reject that conclusion, then the whole crisis has been a contrived farce. Some economists do; they note that downturns always involve losses and disruptions. This one isn't so different. But many economists agree with Paulson and Bernanke. "If we can't calm down short-term credit markets, we're looking at a pretty severe recession," says Michael Mussa of the Peterson Institute for International Economics. "If businesses can't roll over their short-term debt, [they] ask where can we cut back" -- firing workers, reducing spending -- "to avoid bankruptcy."

So there you have it, do we do nothing and risk harm to the real economy (this is the place most of us live)?

To those that oppose the bailout on principle, one can only answer that if Paulson and others are right, will principle heat our homes, feed our children? I know, I know, to paraphrase Benjamin Franklin you can't sacrifice liberty for security, or you don't deserve either. But as a purely practical matter what are we to do if the economy grinds to a halt and massive unemployment is the result?

To those that oppose the bailout in order to punish Wall St. , I would say that you shouldn't swallow poison and expect your enemy to die. It just may be the case that by not bailing out Wall St. we ultimately harm Main St. Perhaps an undesirable, but unavoidable, consequence of providing an environment in which the average American is free to secure his own material well being, is that we have to provide help to those that clearly don't deserve it.

Going forward there are a few things to keep in mind:

1. The stock market is not the economy. Never has been, never should be. There are still people and businesses out here adding real value to the national income, not just creating paper profits for short term personal gain.
2. Nobody knows what will happen -either things will get worse, or they won't. If they get worse, they will either be bad for a long time, or they won't. Be suspicious of anyone that has ready predictions about the future.
3. Everyone should continue to monitor what is going on, read as much as you can (note that I said read, not watch cable). Think about your views and try to make the case for them and against them. Doing this should make thinking about the current circumstance much clearer, which should lead to a better outcome.
4. Always reserve the right to change your mind as circumstances change. Not doing so is extremely dangerous.

Anyway, that is where I am at on the whole thing. Of course, I could be totally wrong, but I doubt it.

5 comments:

Your Lovely Wife said...

Just wanted to be your first comment!

Nora said...

Just wanted to note that I read your blog. Although, I didnt understand half of what you were saying; I will greatly appreciate any educational input I can pull out of it.

Anonymous said...

Just finished reading and agree with
most of your summation. Have READ
some articles on the bailout but do
not trust the sources. Haven't had a
political discussion with you in a
long time, but you pretty much know
my thoughts about the media. Would
appreciate some input on where to
READ some more info. Den and I have
not panicked, but in this election
year are a little uncomfortable.
Linda P.S. Like your spin on this.

Matt DeCleene said...

Hi Jerry:

I very well written piece. I have a couple of comments, If you don't mind. First, I wouldn't dismiss all cable news outlets as if they have nothing legitimate to say. I think we should absorb all forms of media, as long you understand the motives of the source, you will be able to retrieve the applicable information, whether good or bad. Another quick point, lets not forget the responsibility that falls on the American people, Many of the foreclosures (bad paper) are a direct result of people living beyond there means, and that isn't Wall streets fault. Thanks again for a well written piece and the opportunity to add my two cents.

Jeremy R. Shown said...

Hi Matt.

Thanks for the comment. Always happy to talk politics with you.