Tuesday, September 30, 2008

Credit Crisis Critique

Just read a fantastic editorial by Jeffrey A. Miron, senior lecturer in economics at Harvard University, criticizing the credit bailout proposal. Some excerpts:

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.
Let the failing businesses fail. Successful ones will rise. Keep our markets free.

Bailout Defeated (For Now)

Thank you to the bipartisan (133 Republicans and 95 Democrats) defeat of the bailout plan.

Sunday, September 28, 2008

U.S. Credit Crisis

I've been closely watching the drama over the credit crisis this week and it has been absolutely infuriating.

It seems to me that the major cause of this problem is not getting the attention it so badly needs and deserves. This morning George Will said it well on This Week with George Stephanopoulos:

The sainted American people are the problem here. That is they have 105 billion credit cards. That's 9 per card holder. Self reporting they have about $12,000 credit card debt per household. Household debt is 139% of household income. I mean, they can't go on like this. The refusal to defer gratification is a fundamental attribute of childishness.
Over the past decade we have seen millions of people irresponsibly borrowing for homes they can't afford and corporations and government policies irresponsibly enabling them.

Excerpts from a 1999 NY Times article:
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
This all led to increased home demand and sky rocketing housing prices which worsened and fed the problem. Now those of us who have been living within our means (and perhaps saving our pennies hoping to purchase one of those overpriced homes) have to "bailout" these lenders and borrowers? This is anti-American socialism and sickening.

My admittedly limited economic knowledge tells me we should let the free market be free. Failing businesses should fail, people should live in homes or apartments they can afford, and the housing price bubble should pop.

I heard one pundit say that we risk "a recession of up to 5 years" if we don't do the bailout. If a 5 year "correction" is needed so be it. I'd rather live through a multi-year economic downturn than take a major step away from free market capitalism.

Treasury Secretary Paulson has seemed to imply things would be worse than that and we risk some sort of economic dooms day without doing the bailout but he hasn't provided a real description of what that means or looks like.

The Presidential candidate who can stop this and the total economic collapse as envisioned by Paulson wins my vote.