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Mr. FRANK of Massachusetts.
Madam Speaker, a great deal has been written and spoken, understandably, about
various efforts by the Bush administration--with and without Congressional authorization--to
rescue major financial institutions. Unfortunately, a great deal of that
analysis has been distorted, inaccurate, and ill-informed. In the Washington
Post, Wednesday, September 10th, Steven Pearlstein once again provides a
thoughtful, balanced analysis of the public policy issues involved here. I urge
all Members, Madame Speaker, to read Mr. Pearlstein's analysis and keep it in
mind as we deliberate going forward on these issues. As he very sensibly puts
it, ``In the end, the right way to think about these rescues is not to simply
ask how much they are likely to cost, but how the rescue compares to the cost
of doing nothing.'' Mr. Pearlstein's insightful approach to the current
economic crisis is one of the most important assets we now have, and it is one
that is not being impaired by current trends.[From the Washington Post, Sept.
10, 2008]
DON'T LIKE BAILOUTS? CONSIDER THE ALTERNATIVES
(Steven Pearlstein)
First came the rescue of Bear
Stearns and the Fed loans to cash-strapped investment banks. Then the
government stepped in to fill the financing gap left when private lenders
retreated from the college loan business. Last weekend brought the takeover of
Fannie Mae and Freddie Mac. And now the Not-So-Big Three are headed our way
looking for $50 billion in retooling loans.
When is this going to end?
The honest answer: With stock
markets swinging 300 points a day and the economy diving into recession, not
anytime soon.
Indeed, the chances are pretty good
that by year's end, Washington
will have to bail out another big bank or investment house along with a bond
insurer or two. And taxpayers will be called on to replenish the coffers of the
federal agencies that insure private bank deposits and private pensions.
Already, there's been plenty of grumbling
from editorial writers and market-oriented conservatives that the country is on
a slippery slope toward socialism. They also fear that these rescues will
encourage reckless risk-taking in the future, creating the expectation that if
bets go bad, Uncle Sam will always be there with a bailout.
From the left, meanwhile, come
populist complaints that government has committed enormous amounts of taxpayer
money to bail out corporate fat cats and rich investors while ignoring the
plight of millions of Americans facing personal bankruptcy and foreclosure.
While there is validity to these
concerns, they are also based on a number of false assumptions, chief among
them that vast sums are expended on these rescues.
History shows that rather than
costing taxpayers, the rescues have often wound up making money.
That was the case with the Home
Owners Loan Corp., a New Deal agency that bought mortgages from banks and wound
up with a small profit by the time all the loans were paid up in the early
1950s. The same was true of the controversial loan guarantees made to Lockheed
and Chrysler in the 1970s. More recently, following the Sept. 11 terrorist
attacks, the government set up an Air Transportation Stabilization Board that
offered loans and loan guarantees to a handful of cash-strapped airlines. The
agency now expects to close out its books in the black.
In the case of the $29 billion that
the Federal Reserve loaned J.P. Morgan Chase to take over Bear Stearns, the
final cost won't be known until the Fed sells the asset-backed securities it
took as collateral for the loan. So far, so good: As of June 30, those assets
had an estimated market value of $29 billion.
It's anyone's guess what the Fannie
and Freddie rescue will cost, but at this point it looks to have been
structured on terms quite favorable to the government. Although the government
is yet to put a dime into the companies, it has received $1 billion worth of
preferred stock and warrants for 80 percent of both companies' common stock
simply for agreeing to provide backstop financing.
Over the next few years, however,
the Treasury will almost surely have to invest tens of billions of dollars to
keep Fannie and Freddie adequately capitalized, and how much of that money will
ultimately be recovered depends on how things turn out with the millions of
mortgages the companies hold or have guaranteed. But if it is willing to wait until
housing markets finally recover, there's a good chance the government will
recoup most of its investment, along with a 10 percent annual dividend and a
hefty guarantee fee.
In the end, the right way to think
about these rescues is not to simply ask how much they are likely to cost, but
how the rescue compares to the cost of doing nothing.
It's not hard to imagine, for
example, that if nothing had been done, Fannie and Freddie would have been
forced by nervous bondholders to hunker down and throttle back its
housing-finance activities, further destabilizing financial markets and
accelerating the housing market's downward spiral. Those, in turn, could have
easily turned a short recession into one that was longer and deeper--one that
cost Americans an extra $200 billion in lost income, several hundred thousand
additional lost jobs and a net loss to the Treasury of $80 billion. Suddenly, a
Fannie/Freddie rescue begins to look like a bargain.
Aside from the money, of course,
there is also the problem of moral hazard--the concept that unless markets are
allowed to inflict the full measure of punishment on investors and executives
for their bad judgments and undue risk-taking, it will only invite bad judgment
and undue risk in the future. But using moral hazard to argue against the
carefully structured rescues of Bear Stearns or Fannie and Freddie is a bit
likely arguing that any sentence short of capital punishment is insufficient to
deter bank robbery.
Remember that even with the
rescues, top executives at Bear Stearns, Fannie Mae and Freddie Mac lost their
jobs, their reputations and most of their net worth, while long-term investors
lost all but a tiny fraction of their money. It's hard to imagine that anyone
will look back on those experiences and see anything but a cautionary tale.
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