In the movie Pretty Woman (a movie whose appeal has always mystified me) Julia Roberts plays a prostitute who is as pure as the driven snow. Sure she has sex with guys for money, but we know she’s pure because she doesn’t kiss.
The think tank fellows and Republican leaders who supported the bailout are trying to follow this model. Sure they just handed out over a $1 trillion in cash and loan guarantees to the financial industry, but they are attempting to retain their free-market purity by resisting the $25 billion give-away for the auto industry. They’ll do everything, but they won’t kiss. And if they play their cards right, they just might get taken out for a shopping spree!
In case any of you buy the argument that a bailout was necessary for the financial but not the car industry because the former posed a systemic risk to the economy, let me remind you of the hysterical and false claims that were made about the need for the $700 billion+ bailout. We were told around September 20 that if Congress did not pass the bailout immediately the financial world would collapse. We heard all sorts of metaphors involving fires, abysses, clogs, freezes, etc…, but almost no actual analysis of why the problem required a giant expansion in government activity in the economy.
As it turns out Congress did not act right away and the world did not end. They didn’t pass a bill until October 3, almost two weeks later. And when they were pushing passage of the bill, supporters once again warned that the world was going to end unless we coughed up the money. Banks desperately needed the government to buy illiquid assets from them to clean up bank balance sheets and restore liquidity.
Guess what? The feds never got around to buying any of those assets and the world still didn’t end. Instead the Treasury department decided to buy direct stakes in financial companies, but they’ve been doing it gradually and are nowhere near deploying the full $700 billion. I thought the world was going to end if those assets didn’t get off bank balance sheets ASAP. Nope, apparently the issue was being hyped again.
It’s true that Libor rates, the rates at which banks lend to each other, had spiked to very high levels around September 20, indicating that banks were unwilling to lend to each other. But credit was still being extended to consumers and non-financial institutions at reasonable rates. Banks had made a ton of bad loans and some investment banks and insurance companies had made some awful bets. And no matter what, those losses were going to have to be realized eventually and there was going to be a lot of pain. But the entire credit market had not seized up.
Some folks were proposing that Libor rates could be reduced and inter-bank lending restored without handing out $700 billion; instead we could address these problems by improving transparency on the health of various banks. Banks were afraid to lend to each other because they were afraid that some of them wouldn’t be able to repay. Greater clarity on which banks were going to fail and which were not, could have reduced that uncertainty and allowed the (healthy) banks to lend to each other again.
My point is that we didn’t have to go down the path of the ginormous bailout. And holding the line on bailing out the auto companies doesn’t atone for the earlier errors. Bailout backers should be held accountable for pushing us into an unnecessary and huge expansion in government responsibility over the economy.