Monday, September 22, 2008

Wall Street Bailout Prevents Deeper Crisis

There's tremendous churning around the blogosphere on the Wall Street rescue plan pending before the Congress.

The Democratic-left is looking for a more aggressive proposal, one that offers
financial assistance to homeowners and places limits on executive compensation. On the right, a chorus of commentators is gasping at the price tag of the bailout, and especially the unprecedented grant of authority to a newly empowered treasury czar who will administer the bailout.

as I noted earlier, the Paulson plan may work. And not only that, as James Pethokoukis argues, the biggest argument in favor of the rescue is that the bailout may save American capitalism itself:

What would be the dollar cost of not bailing out Wall Street? Try a number north of $30 trillion. (The awful math is detailed below.) That's why Hank Paulson and Ben Bernanke were so scared last week. And, yes, I think "scared" isn't too strong a word. You don't think they convened an emergency nighttime meeting of congressional leaders and then walked out with something close to a blank check for a trillion bucks because they thought we were headed for an outright recession, even a fairly nasty one?

Nope, I think they believed, and got Congress to believe, that the economy was on the verge of something far worse than the worst downturn in a generation. And that is why they went with the so-called nuclear option: the biggest financial bailout in history. In the words of JPMorgan Chase economist James Glassman, "Thankfully, we and our friends around the world who are watching the economic lights come on will never know where events would have led, if the clock had not stopped [last] Thursday afternoon.... Last week's events made the 1987 stock market crash look like child's play."

As plumbers say about pricey repairs, "Sure, it costs money. It costs money because it saves you money." And plumber in chief Paulson had a pretty big pipe, loaded with toxic debt, to unclog.

Pethokoukis adds this:

Bottom line: Lots of folks have problems with the bailout. Liberals don't like a government bailout of Wall Street (instead of more homeowner help). Conservatives don't like a government bailout of Wall Street (vs. letting the market have its way). In a commentary on the National Review website, Newt Gingrich shows great skepticism toward the Mother of All Bailouts, advising that Congress "had better ask a lot of questions before it shifts this much burden to the taxpayer and shifts this much power to a Washington bureaucracy." He also presents several other actions government could take: 1) suspend the mark-to-market accounting rule; 2) repeal the Sarbanes-Oxley law; 3) eliminate the capital-gains tax; 4) undertake an "all of the above" energy plan to keep at home $500 billion of the $700 billion we currently send overseas for imported energy.

Count me as "all of the above" for Gingrich's ideas. (Toss in a corporate tax cut while you're at it.) But what would have been a smart, free-market plan in August 2007 or March of this year isn't enough for right now. Just as government created the environment for the credit crisis, it failed to enact quick solutions. The situation has gone critical. It's time for shock and awe.

One might quibble with the reform elements mentioned by Gingrich, but it's hard to argue with the need for "shock and awe" in trying to make things right.

That said, just like everything else, the rescue's
turning out to be bitterly partisan, and if the lefties get their way, the ultimate shape of the rescue will be diametrically different than Secretary Paulson's plan, with perhaps even the complete and punitive nationalization of the American economy.