Free market capitalism is supposed to be Darwinian. But the Bush administration — over the opposition of congressional conservatives — is about to post a life guard at the financial gene pool.
What little hope of preserving free market capitalism lies with the Republican Study Committee — a group of about 100 House conservatives — who caused the bill to fail in a Monday vote and who are trying to stop it again.
The RSC’s opposition is principled, not ideological. And their alternative provides a credible proposal to solve the credit crunch without the extreme market interventionism of the Bush/Paulson plan.
The Bush administration is about to succeed despite the apparent end of the credit crisis because the free market is acting without being “helped” as the president proposed. But before we get to why the crisis really is over, we have to assess the continuing panic in Washington.
Starting today, the Monday showdown will be re-staged on the floor of the House with a vote probably tomorrow. The Senate’s lopsided vote is intended to corner House opponents and whittle away at the 228-205 margin by which the Bush/Paulson plan failed. Originally, the Senate planned to recess for the election, leaving the House no alternative to an up-or-down vote.
But the White House and Senate leaders assess the House bailout opponents’ strength correctly. Fearing the bailout opponents might succeed, the Senate has remained in session. We should hope their fears are justified.
Last night — by a 74-25 vote — the Senate amended and passed the Bush/Paulson nationalization of the financial market passing their bill to the House.
The Bush/Paulson plan — driven by fear, both political and financial — transfers control of the financial markets from banks and brokerages to Congress and the Treasury Department. As even the president’s staff said, it was an “extremely interventionist” proposal.
The version passed by the Senate last night is no less so. The original Paulson plan for immediate authority to buy up to $700 billion in unmarketable mortgage-based securities is cut in half, with the other half available upon a second congressional vote. It is larded up with tax relief for many — an extension of the Alternative Minimum Tax fix, and other such — and with tax earmarks: tax relief aimed at single entities, such as an Oregon arrow manufacturer.
Oregon arrow manufacturer? Tax earmarks? Yes, tax earmarks. And you thought the mess in Washington couldn’t get any worse.
The Senate-passed bill still has no mailed fist inside the velvet glove: the bailout focuses on saving the banks and bankers more than protecting the taxpayers or the freedom of the market. It is a terrible plan that will nationalize the finance industry under Paulson as Czar, with power over the market to buy and sell the illiquid mortgage-backed securities (based on bad risk sub-prime mortgages).
After the President’s bailout plan was defeated soundly in the House of Representatives on Monday, the Dow Jones Industrial Average closed the day posting a loss of 777 points. It was just as Hank Paulson said: the financial apocalypse was upon us. Or not.
Then, an amazing occurrence: as Tuesday dawned, people emerged from their homes, looked up and saw the sky. It hadn’t fallen. And then the stock market opened and — by 3 pm — recovered more than half of the previous day’s loss. It fell another 20 points on Wednesday.
But the stock market is only a secondary indicator. The credit crunch is all about interest rates.
Much more importantly than the Dow’s ups or downs, the action of the Federal Reserve on Monday apparently ended the crisis. Saying “damn the inflation, full speed ahead” the Fed dumped $630 billion in new lendable funds into the banking system on Monday.
The credit market is hogtied because the available credit is stuck in the glue of the unmarketable securities based on bad sub-prime mortgages. The better measure of the problem is the international inter-bank lending rates.
The European OECD measures interbank rates. Its reports show that the US rates actually came down from 4.8% in October 2007 to 2% in August 2008. LIBOR — the London Interbank Offered Rate — is one of the best gauges of the credit markets. According to an October 1 report in the Financial Times, “The Libor rate for overnight US dollar borrowing was fixed at 3.79 per cent, a plunge from 6.87 per cent on Tuesday, with a similarly large fall seen in sterling overnight interest rates.”
That means the credit markets are reacting massively and positively to the Fed’s cash infusion on Monday.
The crisis is over. All that remains is the power grab by Washington to nationalize the credit market.
The Bush administration wanted control of the financial markets and didn’t know if what they proposed would work, or what it would cost taxpayers to do it. Now that’s scary.
It was scary enough that the House conservatives — who have long worked together under the banner of the Republican Study Committee — succeeded Monday in their fight to defeat the plan. The conservatives opposed it, as Rep. Gohmert explained in a Monday article in HUMAN EVENTS, because they didn’t believe either the administration’s case for urgency or that the Paulson bailout plan was the right one.
These conservatives led by RSC Chairman Jeb Hensarling (R-Tx), and joined by the usual suspects — Mike Pence (R-Ind), Louie Gohmert (R-Tx), and many others — are the main opposition to the Bush/Paulson bailout plan. We should be grateful for their courage and determination. But that’s not all.
The RSC alternative is a broad approach, based in part on a “work-out” rather than the Bush/Paulson “buy-out” and in part on the models of other government programs to guarantee mortgages and securities that have worked, such as Ginnie Mae which — so far — appears to be sound.
The RSC package is the free-market solution that provides a medium-sized carrot and a big stick. The Treasury would insure banks against 100% of their losses in mortgage-backed securities, and the banks would pay premiums for that insurance.
But one thing it doesn’t provide is what Hank Paulson insists on as a starting point: purchase by the government of the illiquid securities (at some price, to be sold at some other price some day, some where over the rainbow) to rescue the banks and brokerages that need to resume making and taking loans.
If there is a workout to be done — and the RSC’s plan looks more reality-based than the administration’s bill — why shouldn’t that be tried before we bail out the banks and save many who shouldn’t be saved? The crisis is apparently over, and only the panic remains.
Until someone can explain why that’s wrong, conservatives must stick with the RSC plan. And oppose the Bush/Paulson bailout.
The House will vote again today or Friday. If the RSC does its best, it can again prevail. It must, if free market capitalism is to survive.
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