Holman Jenkins wrote a very provocative editorial in yesterday's Wall Street Journal, entitled "How Democracy Ruined the Bailout." So provocative is it that CNBC's Rick Santelli declared that 'every viewer should read it.'
The essential point of Jenkins' excellent piece is that Bernanke never needed to go to Congress for the TARP. He had at his disposal sufficient tools and resources to take all necessary actions without subjecting the solutions of the housing, securitization and banking crises, beginning in 2007, to the vagaries of pork-barrel politics by approaching Congress for "help."
Jenkins ticks off a list of actions taken by the Treasury, Fed and FDIC prior to the TARP:
-guarantees of money market funds
-guarantees of liabilities of banks
-liquification of bank assets by expanded repo programs.
By subjecting system repairs to the votes of Congress, Bernanke and Paulson mistakenly introduced legislative excess and grandstanding into what could have remained a well-contained triage process among the technically qualified, empowered components of the administration.
By opening Pandora's Box, the two officials exposed what Jenkins calls "the delicate job of maintaining confidence in the financial system" to 535 political hacks.
My business partner and I discussed this yesterday, and came to the conclusion that Bernanke waffled because he lacked the confidence that his predecessors possessed. Volcker ran the New York Fed, and had been a longtime Federal Reserve heavyweight when he became Fed Chairman. Greenspan, for all his mistakes, was a veteran Washington power player. He had been an economic adviser to Nixon and Ford, an economic consultant, and generally well-respected player on the national economic scene.
Bernanke was a senior Fed official in between academic posts. While unquestionably technically competent and well-prepared for his job as chairman of the Fed, Bernanke seems to lack a strong sense of independence and self-confidence.
As Jenkins notes, we are all paying a terrible, costly price for that now.
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4 comments:
That was an attrocious op ed. It seems to assume holders of bank debt have a god given entitlement to a bail out by the Fed, and Bernanke should have given it to them. Balderdash. If bondholders wanted debt backed by the US government, they should have bought US treasuries or Ginnie Maes. They bought private debt with no federal backing.
Bernanke's dithering is a good thing. The slow drip of bad news and capital infusions will let the public build up the anger to force a haircut on bondholders. And prevent confiscatory levels of taxation to bail them out.
God bless the democratic process.
Of course I disagree with you totally on this.
Jenkins' point was not that Bernanke and Paulson would have 'bailed out' the banks, but that they would have taken appropriate steps sans Congressional interference.
Bernanke's dithering has been disastrous. I wrote a post several months ago about the risks of doing enough early, and frightening investors, versus waiting and doing continuing triage.
There was a way to handle this more effectively up front, and it involves Anna Schwartz' observation about sovlency vs. liquidity.
By the way, commercial and investment bank owners didn't get 'bailed out,' in that billions of equity were lost. Jobs, too.
Jenkins, however, is entirely correct. Politicizing what should have been merely a technical process using existing facilities- FDIC, deposit insurance, bankruptcy courts, etc.- was and is a huge mistake.
-CN
"By the way, commercial and investment bank owners didn't get 'bailed out,' in that billions of equity were lost. Jobs, too."
Not good enough. I want bondholders and counterparties to take a haircut sufficient to give the banks a comfortable equity cushion.
Thank you for your keen writing though. I enjoy your blog.
Anonymous #2-
Thanks for your comment and compliment.
I don't agree with you on debt holders and counterparties.
Debt holders are, like other claimants, non-voting creditors. Why should they be unduly penalized, if, after taking out shareholders, there is value left to allocate?
They will bear the haircut the market demands, in the form of discount from par to raise the effective interest rate for risk.
Counterparties, too, will bear the risk they should, in terms of whatever failures they experience.
But somehow mandating those losses arbitrarily seems pointless, to me.
If these lenders and counterparties lose value, as a result of market pricing, so be it. But what need is there for otherwise-unnecessary, punitive action by government?
-CN
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