A friend e-mailed me before the House passed the TARP on the second go-around, asking what my worst-case scenario was in the event the government decided to just let free markets correct themselves.
I told him that was like the old Tootsie Pop commercials - you know, the ones with the wise old owl, who's asked, "How many licks does it take to get to the center of a Tootsie Pop?" The owl, of course, takes three licks, then bites right into the sucker to get at the chocolate center.
In other words, the answer to both questions is, we don't know, because it's never been tried.
But we do know that every time the US government - or any other government, for that matter - has intervened in a financial crisis, they have made it worse, and the citizenry has suffered mightily for it. The Great Depression, the S&L crisis, and now this mess. All created by government, who then dump on us taxpayers to "fix" it.
It just goes to demonstrate something that I included as a slide in the presentation I mentioned in yesterday's post, the one where I traced the legislative history of this fiasco back to 1933. The slide was headed, "The Wisdom of the Georges," and included these quotes:
"Those who cannot learn from history are doomed to repeat it." - George Santayana
"We learn from history that we learn nothing from history." - George Bernard Shaw
"What experience and history teach is this: that people and governments have never learned anything from history, or acted on principles." - George Wilhelm Hegel
"As housing goes, so goes the economy." - George H.W. Bush
On to global warming. I never really put much stock in it. Every time I have to shovel 8 inches of "global warming" off my sidewalk, I get mad at Al Gore.
But now, I'm a believer.
Global warming must exist. Because I keep hearing all these intervention-happy Chicken Littles running around screaming that the credit markets are frozen and nobody's lending money or providing capital.
Yet -
Allianz AG just pumped $2.5 billion into The Hartford. Warren Buffett invested $5 billion in Goldman Sachs. B of A is raising $10 billion in a stock offering. It's going more slowly than they anticipated, and they're not getting the price they'd hoped for, but they're raising the money nonetheless. Fairfax Financial is buying International Forest Products. Citi and Wells Fargo are fighting over Wachovia.
Credit unions reported positive year-over-year loan growth in every category but auto loans. I'm still getting mortgage offers in the mail. My credit card companies have been sending me those stupid cash advance checks every couple of weeks, urging me to use them.
In short, credit markets are not frozen.
The Fed, in justifying the exercise of emergency powers (enacted during the Great Depression, by the way) to buy commercial paper (CP), noted that the CP market was more than $2.2 trillion last year, and it's just $1.6 trillion now.
Besides the fact that the Fed is out of money, and has to borrow from the Treasury (who has to borrow from China) to fund its daily operations, let alone all the happy lending it's doing; and besides the fact that it's creating a Special Purpose Vehicle (SPV) to do this, and SPVs and SIVs were huge contributors to this calamitous melt-down to begin with; a little curtailment of credit might be called for.
I recently gave an economic outlook in Arizona, and I showed graphs of the growth trends in US consumer, mortgage, business, state and local government, and federal debt. Guess which one had the most alarmingly rapid rate of increase in indebtedness over the past few years?
Business debt.
We've over-leveraged, from Wall Street to Main Street (every spineless crook of a politician and his brother is using the term, I may as well too) to your street and my street. Today we also learned that consumer credit contracted for the first time since 1998, and by the largest amount on record.
Good! That's what needs to happen!
Businesses are paring back. Only smart deals are getting done, not the stupid deals that add no value except to investment bankers' bonus checks. Yes, the cost of borrowing is higher. Artificially low rates on all kinds of loans were a big contributor to the great over-leveraging to begin with. So risk is now being priced appropriately again.
Consumers are paring back. They're paying down their credit cards, which is prudent. Mortgage borrowing is being pared back. We're back to the prudent practice of requiring 20% down, proof of income, and a good credit history to get a mortgage. State and local governments, by necessity, are paring back spending, because their income and property tax receipts have been decimated.
Now if only the federal government would get on the bandwagon.
But no, they cry that the economy needs credit, that you and I need to borrow more, that more renters need to become homeowners, that businesses need to borrow and expand and merge. And to git 'er done, they're mortgaging our future to the limit.
Only it won't work.
Remember how they all ran around screaming and waving e-mails from constituents whose 401(k) balances were down after the 777-point sell-off that followed the "no" vote in the House on the bailout? Remember how they said we needed to pass that bill in order to avoid a recession, job losses and the markets tanking?
Have you seen the market's reaction to the bailout?
Since the time of Friday's vote, when the Dow was up on the day by 315 points, it has shed 1,348 points. Almost twice what it lost after the "no" vote.
Dear Congressperson: Thank you for voting yes and saving our 401(k)s. Now please go on recess.
A final note. A reader sent me an e-mail of an exchange on CNN between a financial talk-radio host in Philly and CNN's Senior Business Editor, Ali Velshi.
The guy was pooh-poohing the notion that credit markets are frozen, basically taking the position that the bailout is unnecessary, and that free markets should be allowed to correct themselves, and that we would survive if they did.
Velshi came on and started railing on the guy, screaming that the credit markets are frozen. The guy asked for his fax number so he could send him a mortgage approval that he'd just received from a local bank on a property he was buying.
Velshi's comeback: "Oh sure, you can get a mortgage, but what about the blue-collar guy who's credit isn't so good?"
That. Is. The. Entire. Problem.
The best part of the exchange actually came when the radio guy asked who it was he was talking to. Velshi identified himself, and the radio guy asked what Velshi's qualifications were. Velshi sputtered that his advice mattered more than his qualifications.
I did a little google search on Ali Velshi, and found a Wikipedia entry on him. He grew up in Canada, and then got a college degree in ...
Religious studies.
He then received a fellowship to the US Congress before becoming a beat reporter in Toronto, eventually gravitating to business reporting.
No wonder he didn't want to reveal his credentials.
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