The Inmates In Charge of the Asylum

by Sal on February 11, 2009

in Economy,Politics

I’ve been watching in somewhat horror the events of the last few weeks unfold.  We have this major financial crisis, which consists primarily of a series of bad assets that were created and fostered by liberal government programs.  And how are we trying to fix it?  With more liberal government programs.  TARP, by all accounts, was a dismal failure at its objective.  Of the architects of TARP, one of them, Tim Geithner, is now Secretary of Treasury and is trying to get TARP-II going, which involves more government liberal programs and is at this point likely not to work.  Our President still thinks he is on the campaign trail, and that he can blame Bush for the “failed policies of the past.”  Let it be known, this is not Bush’s recession, this recession is primarily the result of the policies of the Democrat party:

Regardless of the causes of the current crisis, the inmates (Geither, the Democrats in congress, and as Rush and others are now speculating, possibly triggered by someone  trying to damage the financial system) are now trying to fix it.  The problem is that they are driven by panic, trying to solve an economic situation that is unprecedented, unknown, and possibly far worse than we ever could have imagined:

All along two contrasting views have been held on what ails the financial system. The first is that this is essentially a panic. The second is that this is a problem of insolvency.

Under the first view, the prices of a defined set of “toxic assets” have been driven below their long-run value and in some cases have become impossible to sell. The solution, many suggest, is for governments to make a market, buy assets or insure banks against losses. This was the rationale for the original Tarp and the “super-SIV (special investment vehicle)” proposed by Henry (Hank) Paulson, the previous Treasury secretary, in 2007.

Under the second view, a sizeable proportion of financial institutions are insolvent: their assets are, under plausible assumptions, worth less than their liabilities. The International Monetary Fund argues that potential losses on US-originated credit assets alone are now $2,200bn (€1,700bn, £1,500bn), up from $1,400bn just last October. This is almost identical to the latest estimates from Goldman Sachs. In recent comments to the Financial Times, Nouriel Roubini of RGE Monitor and the Stern School of New York University estimates peak losses on US-generated assets at $3,600bn. Fortunately for the US, half of these losses will fall abroad. But, the rest of the world will strike back: as the world economy implodes, huge losses abroad – on sovereign, housing and corporate debt – will surely fall on US institutions, with dire effects.

Personally, I have little doubt that the second view is correct and, as the world economy deteriorates, will become ever more so.

Even some conservatives believe that the government handling of these troubled assets are necessary to solve the problem.  I have been tough on these conservatives in the past, and some of that has been vindicated.  Many conservatives were arguing for TARP, saying that it was the only way that we could be solvent.  The bill was then rushed through, and people did not have enough time to read it to realize that it gave Paulson the power to do whatever he wanted with the money, rather than what they were sold on.  Such is often the case of rushed legislation (hello stimulus).

I don’t pretend to know what the solution is to this problem.  Obviously some government intervention is needed simply from a coordination standpoint, but it needs to be a clearly-defined plan that will give confidence to investors, be minimally invasive, and be short in term (one alternative proposal has the banks being nationalized, but only for a few days).  What we need are some conservative alternatives by conservative economists to break the banks free of the government intrusion that got them into this situation to begin with, and is minimally invasive to our financial system and to the American taxpayer.  Already, we are dealing with almost $10 Trillion in bad investments to attempt to stave off this crisis.  Can we afford another feeble attempt that fails?  Or are we stuck with four years of inmates running the asylum, only making the situation worse?

{ 3 comments… read them below or add one }

RoseThistle February 11, 2009 at 8:03 am

I want to know why the $5.5 billion electronic run on banks last year isn’t being reported FAR and WIDE?


Tornadoes28 February 11, 2009 at 1:20 pm

There are many people who would say that it was the conservative, pro-business, policies of the Republicans and the Right that are responsible for the economic mess. Republicans tend to be for less government oversight and for letting the free market rule. And due to the lax oversight, the financial and real estate industry engaged in bad and dangerous business practices and improper lending. I personally think that both the left AND the right are responsible. I certainly am not naive enough to blame the liberal left for the current economic situation as you are. I absolutely respect your belief in conservative policy, which is the way I lean as well. But don’t let that blind you. The conservative Right is not ALWAYS right and the democratic left is not ALWAYS wrong.


Sal February 11, 2009 at 1:32 pm

Those many people would be wrong. The financial and real estate industries engaged in bad business practices and improper lending because government mandated a loan approval process, mandated that these bad loans occur in order to expand home ownership, and basically told the banks that the government would back these loans. It was increased government oversight that led to these toxic assets, not lack thereof. It was Fannie Mae and Freddy Mac (quasi-government agencies) guaranteeing to buy up these bad loans that artificially inflated their value on the open market. It is the conservative right that tried to clean up the mess several times, but were blocked by the left and by squishy, moderate Republicans every time they tried to clean it up. Republicanism is very much involved in the mess that we are in, but Conservatism is not.

The conservative right is not always right, they made a lot of mistakes because they did not always live up to principle. The liberal left is most often wrong, because their ideas are not based on objective fact.


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