March 22, 2008

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It is a universal rule observed by all Republicans time and time again: repeat something over and over again, irrespective of its truth and by repetition, it becomes conventional wisdom, otherwise known as living in a post-fact society. So in discussing the state of the economy with Senators Chuck Schumer and Jon Kyl on This Week with George Stephanopoulos, when Schumer points out that the Bush administration policies of protecting corporate welfare, such as the Bear Stearns bailout, and ignoring consumer issues like the rising foreclosures has resulted in the worse economy since Hoover, Kyl lashes out and says it's the Democrats in Congress who are like Hoover, not Bush.

I was wondering how long it would take my friend Chuck Schumer to blame the Bush Administration here. Of course, it wasn’t the Bush Administration so much as the Democrats in Congress who were pushing the lending institutions to get out there and lend more money even to unqualified buyers: to the minorities, to the poor, to the young. So that everyone could own a home. The Bush administration was somewhat to blame for that as well. But Democrats in Congress were making that push. And as a result, a lot of people took loans who couldn’t qualify. In fact, they didn’t have to qualify. No money down. There was no credit reporting. And a lot of them, frankly, couldn’t afford it. So let’s don’t blame the Bush administration for this, and as to Hooverism, it’s Sen. Schumer and his Democratic colleagues who want to raise taxes like Hoover did when he refused to allow the Coolidge tax breaks to stay in effect and put in the Smoot-Hawley and they of course, are opposing the free Trade agreements that the President is trying to bring up. Let’s understand here the Bush Administration is trying to be pro-active on both the tax and trade fronts and it does not oppose some of the things Chuck talked about.

Um, huh??? The Democrats, who have only had a paper-thin majority since January of 2007 and couldn't even get most of their bills on the table before that are the ones like Hoover? What are you smoking? Kyl blames the defaulters on their loans (those undeserving minorities and poor) and conflates that with free trade and taxes. And what on earth does the Smoot-Hawley TARIFF act have to do with the current crisis other than Smoot and Hawley were Republicans?

Hale Stewart looks and the pros and cons of the Fed's actions last week in a far more intellectually honest way than Kyl does:

The central reason why the Federal Reserve acted like it did was to prevent a financial sector meltdown. While there is no way of knowing for sure there was a strong possibility that a Bear Stearns bankruptcy would have frozen the credit markets. This would have had chilling effect on the credit markets and could have frozen them solid. This could have sent the economy which is already teetering on the edge of recession (if it's not already in one) into a very deep recession. It's important to remember that leading up to this event were signs of extreme distress in the credit markets. Auction rate securities -- a primary way that municipalities obtain short-term funds -- pretty much dried up over the last 2-3 months. Structures Investment Funds -- SIVs for short -- were experiencing the same problems. In effect, the Bear Stearns situation occurred at the end of a building problem in the credit markets. If Bear had failed there is more than a small likelihood that the end result would have been a much deeper recession than we will have.

On the con side, the Federal Reserve clearly bailed out a firm who's own decisions were responsible for its downfall. Bear decided of its own free will to get involved in the hedge fund and mortgage market. That was a bad decision and they have paid the price. In a free market economy (which we're supposed to be in) stupidity of this type is supposed to fall by the wayside by being unprofitable and therefore eventually going bankrupt. Some commentators have correctly noted that the Fed's action essentially "privatizes the gains and socializes the losses" of the investment community. Finally the Fed's action creates what economists call a "moral hazard". This simply means that by bailing out stupid behavior the Federal Reserve is essentially allowing it to happen again.

CREDO Action has a petition you can sign asking your congrescritters to pass the Foreclosure Prevention Act.

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