Accountability Wins… For Now

The $700 billion bailout (err.. "rescue plan") just failed to win approval in Congress, with substantial numbers of both Democrats and Republicans refusing to vote in favor.  Although it was revised from the first pass "blank check" bill so that some of the bailout loans could actually become profitable investments and resold at taxpayers’ benefit, a bailout is still a bailout. 

An absolution of accountability, when accountability is needed.

Jack Welch (the turkey) added to our list of culprits in his latest Business Week column.

The list is long indeed: Congress, for overzealously pushing homeownership; the Fed, for keeping interest rates so low; predatory lenders, for taking advantage of unqualified and sometimes vulnerable home buyers; and home buyers, for getting in over their heads.

The list goes on: the White House, for letting banking regs become too loose; finance executives, for selling products they didn’t understand while enjoying outsized profits; mark-to-market accounting, for accelerating the downturn; rating agencies, for mischaracterizing paper; and short-selling hedge funds, for betting on doomsday—thereby ushering it in.

Yes this will be painful, as the markets clearly told us after the vote.  But creating a perception that there’s no accountability for poor leadership and even worse management will be even more painful in the long run.  Jeffrey Miron, an economist at Harvard and one of 166 academic economists who signed a letter to Congress opposing the bailout, has a similar opinion.

This bailout was a terrible idea. Here’s why.

The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.

Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.

This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.

As much as many people would like to blame big business, it was the government that pushed on the balloon, and it finally popped. He continues…

The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.  Bankruptcy, not bailout is the right answer.

Indeed.  I may have to work a few more years to make up for the losses in my retirement account, but if that’s what it takes to reset the risk-reward equation back to reality, then so be it.  However most likely there will be some compromise in Congress and some form of bailout will happen. 

And ten years from now we’ll be scratching our heads once again wondering how we got into the latest mess.  And perhaps someone will point to the "protections for homeowners" and "protections for investors" and "protections for taxpayers" that will undoubtedly find their way into the compromise bill and get a glimmer of an understanding.