Bailout Brakes

Article excerpt


Well, if you're so opposed to a bailout of Wall Street, what would you do? I get this question all the time from advocates of the proposed $700 billion Wall Street bailout here inside the Beltway. In the nation's capital, this is what passes for a plausible defense of bad policy proposed during times of crisis. We must do something. Here's something. Do it. Now!

If I had any confidence in the ability of the political process to produce a rational, bold response, my answer would be: I would do plenty. Start by unwinding the many government mistakes that created the housing bubble, repealing the various laws and regulations specifically designed to put people into homes that they could not afford. I would scrap the Community Reinvestment Act, break up Fannie and Freddie, and put the pieces back in the private sector. If liquidity and the availability of capital is the immediate problem, I would also repeal the tax on capital gains and other tax provisions that punish savings and capital accumulation. The Flat Tax does all of this in one fell swoop. And, finally, I would repeal the various distortions in corporate accounting hurriedly drafted during previous legislative panics, starting with Sarbanes-Oxley.

An even bigger, but essential, legislative lift would take a serious look at the destructive role the Federal Reserve has played in this financial crisis. Rep. Ron Paul, Texas Republican, was arguing this before it was cool. But it is clear the Fed has become more social engineer than guardian of sound money. Easy credit and low interest rates, intended to ease shocks to the economy, only distorted relative prices and fed the housing bubble.

And then I would let the market work. The policy mistakes of the last dozen years cannot be corrected without some pain. The only question is whose pain? Markets don't work unless mistakes are allowed to be corrected, and losses incurred. Bad actors on Wall Street, or Main Street, should suffer the financial losses produced by their bad bets and carelessness.

Such losses, just like profits in good times, are vital to the functioning of markets. As BB&T Chairman John Allison put it in a letter to Congress this week: Corrections are not all bad. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom.

I doubt that politics could produce such bold action this year, with a lame duck in the White House and a bitter election fight that will determine the next president and political control of Congress. …