Sunday, September 28, 2008

Finance, Continued

MaxedOutMama faults Nationally Recognized Statistical Rating Organizations ("NRSROs")--credit rating agencies that grade securities--for fueling yesterday's boom and today's bust. And Fabius Maximus pictures the problems and provides a solution.

Don't miss the Washington Times on the bail-out:
House and Senate negotiators, including Democratic and Republican members of the Senate Banking Committee and House Financial Services Committee, announced yesterday that they had reached a framework for a $700 billion financial bailout package. Many of the specifics remain vague, but House Speaker Nancy Pelosi said President Bush had agreed in principle with Democrats on basic conditions for the bailout, including help for homeowners (in other words, a bailout that will include many irresponsible people who acquired homes they could not afford) and an equity position for taxpayers in companies that accept public funds (a more plain-spoken description would be one word: "socialism.") . . .

Perhaps the most unfortunate thing about all the Republican support for this fraudulent "rescue" plan is that there are free-market alternatives that have been essentially ignored during the debate. These include repeal of (or at a minimum, dramatically scaling back) legislation such as the Community Reinvestment Act, which gives liberal activist types legal authority to shake down corporations to get them to give mortgages to people who are bad credit risks. It also includes reducing or temporarily suspending capital-gains and corporate income taxes to strengthen the financial industry. But these alternatives appear to have been largely ignored by Mr. McCain and many of his fellow Republicans.
See also former South Carolina governor Mark Sanford in the Washington Post:
For 200 years, the "business model" in our country has rested on a simple fact: that while one may reap rewards from taking risks, one should also be prepared to face the consequences of those risks. Some of the proposed actions with regard to the credit market turn that business model on its head -- absolving those who took too much risk, or bought too much house, from the weight of their own choices. If Congress passes the proposed bailout, we will be destined to have far greater problems in time, leaving those who are prudent in their finances to foot the bill for those who are not. . .

Last week's events were rooted in distressed mortgage securities whose optimistic values were facilitated by quasi-governmental entities Fannie Mae and Freddie Mac. The investment banking capital write-downs were turbocharged by the Sarbanes-Oxley Act, which did what too many laws do -- it fixed yesterday's problem. The amazing expansion of credit was fueled by a Federal Reserve offering an easy-money policy that led us right into a credit bubble. All this was made worse by the government enabling some people's tendency to want more house than they can afford.

With that bubble popped, we will now go through a major financial de-leveraging. It will be painful. Yet to preserve what has made this country great, we need to be on guard against Washington offering endless cures to our ills.
Previous posts on the subject here and here.

1 comment:

Anonymous said...

Complex finance is like complex legalese......designed to deceive.