NO!

by Russ Roberts on September 29, 2008

in Politics

The bailout is defeated in the House, 228-205.

Prepare for the apocalypse. Or not. I think not. But now we’ll find out.

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{ 49 comments }

Randy September 29, 2008 at 2:58 pm

Apocalypse? No. Correction? Yes. Good. Let's get it over with.

J September 29, 2008 at 3:00 pm

Republicans acting like republicans is a wonderful thing.

Martin Brock September 29, 2008 at 3:05 pm

It's almost enough to make me forgive them.

muirgeo September 29, 2008 at 3:06 pm

SWEET!!!

Who knows but I'll be preparing for anarchy mode!

Now off to the local gun shop to buy my first guns in a while.

Wednesday is the big day right. When the next quarters reprots are do.

Carl September 29, 2008 at 3:11 pm

This is wonderful news. There are a multitude of more prudent companies that will jump at the chance to hire the talent that used to work at AIG & others.

T L Holaday September 29, 2008 at 3:18 pm

Democrats acting like Democrats is wonderful, too.

Capitalists acting like Socialists, not so much.

Carl September 29, 2008 at 3:20 pm

muirgeo, i hope you're being sarcastic. the general public was overwhelmingly against this measure.

kurt September 29, 2008 at 3:25 pm

It's not over yet. 15 votes can easily be changed by some pork barrel.

Syphax September 29, 2008 at 3:28 pm

This reminds me of the patriot act.

"Vote for it or your not a patriot!"

and

"We need to pass this NOW! NO NEGOTIATIONS!"

SteveO September 29, 2008 at 3:36 pm

Just to give you a slice of my day at the business school, everyone's freaking out, packed into the lounge watching the wall of flat screen TV's.

I'm hearing "hope you don't like being a student, there won't be any more student loans. Everyone will be gone next semester" etc.

Someone said "We're screwed! My house is worth nothing!". I asked if she was going to move out tonight. Oh- I guess your house still has the value of providing you shelter over your head.

There's only two classes of people here that aren't in panic mode. Me, and the people who have no idea what's going on. But- maybe I'm in that second group, who knows.

Martin Brock September 29, 2008 at 3:37 pm

AIG is already bailed out.

The price of oil is falling at least.

Ironically, by raising the profile of this proposed intervention so hysterically, the Bushniks have both worsened the reaction and guaranteed that Republicans will take the fall for the short term pain.

muirgeo September 29, 2008 at 3:52 pm

muirgeo, i hope you're being sarcastic. the general public was overwhelmingly against this measure.

Posted by: Carl

I'm not. I'm personally glad. The majority of people have been scared by seeing Bush and Paulson using scare tactics and instilling fear into the American people.

The reality of this situation needs to hit home so hopefully the democratic party will get a veto proof senate majority.

I'm all for democracy but it requires an informed public…. NOW THEY ARE ABOUT TO BE INFORMED.

Randy September 29, 2008 at 4:16 pm

SteveO,

This would be a cool time to be back in business school. Throw out the textbooks and follow the news – and the blogs.

Crusader September 29, 2008 at 4:21 pm

Who were the 2 that didn't vote?

Crusader September 29, 2008 at 4:23 pm

Randy:

Are you kidding? The textbooks tell you everything you need to know. The actual news is not necessary…

Nate Oman September 29, 2008 at 4:25 pm

"Prepare for the apocalypse. Or not. I think not."

Russ, I don't want to know what you THINK. I want to know if you are buying stocks, and if so which ones…

Crusader September 29, 2008 at 4:34 pm

Oh, and Megan McCardle is totally imploding over this. Yet she dares to call herself a libertarian. A huckster is more like it.

Bret September 29, 2008 at 4:39 pm

I agree with Russ that the apocalypse is probably not upon us. I think that the Fed can probably handle this. They're the lender of last resort, so they ought to get lendin'.

Methinks September 29, 2008 at 4:50 pm

Now off to the local gun shop to buy my first guns in a while.

Don't forget to load it before you clean it.

Methinks September 29, 2008 at 4:53 pm

Well, the market dropped around 9% at some point after this thing was not passed. That's something I haven't seen in my career yet. Merrill Lynch was down 20% or so.

So much for banning short selling to prevent market declines, I GUESS.

Chris O'Leary September 29, 2008 at 4:58 pm

"The reality of this situation needs to hit home so hopefully the democratic party will get a veto proof senate majority."

I fail to see how the failure of yet another grand socialistic experiment, in this case the government-mandated relaxation of proven credit evaluation standards, will (or at least should) ensure a democratic majority this fall.

Of course, I also fail to see how increased regulation will make things better given that the root cause of the problem is that regulators (or at least incentivizors) at Fannie Mae and Freddie Mac the proper functioning of the market.

But that's just me.

Randy September 29, 2008 at 5:26 pm

"Don't forget to load it before you clean it."

Harsh! Funny… but harsh :)

muirgeo September 29, 2008 at 5:33 pm

Don't forget to load it before you clean it.

Posted by: Methinks

Nothing personal but I understand you work on Wall Street and I'm pretty sure no ones gonna be taking your advice for a while.
If financial products were guns this would be what the Wall Street version would look like. Dumbasses!

Mike Warot September 29, 2008 at 5:39 pm

It's great that our Representatives listened to us, it sucks that it was probably the stupidity of Nancy Pelosi that finally drove them to do it.

Now we can get on with the business of surviving the last 4 months of the Bush administration.

Martin Brock September 29, 2008 at 5:46 pm

… the government-mandated relaxation of proven credit evaluation standards …

Kling didn't agree with Russ that government mandates, primarily, relaxed credit evaluation standards. He blamed excessive reliance by private lenders on credit ratings without due regard for the behavior of home debtors as house prices fall.

Congress encouraged easy credit to low income borrowers through the GSEs, but this encouragement is not the whole story or even the most interesting chapter, according to Kling. The housing bubble was not limited to the low end of the housing market.

If we can believe Hillary Clinton, the high end apparently was even more inflated, and Russ's NPR interview last week supports this appearance, at least anecdotally. One family mortgaged a house at $250,000 and sold it for half a million four years later. Then they went for double or nothing, swallowing subprime mortgage terms in the process. That's what they said they were thinking.

You've described the substitution of one regulatory scheme ("government mandated relaxation") for another ("proven credit evaluation standards"). I'm still not sure that Congress mandated lower standards as much as it permitted lower standards by not mandating stricter standards, but if it did effectively mandate the lower standards, the low standards were not "deregulatory".

Regardless, even if Congress compelled FNMA to buy subprime mortgages, it didn't compel the rent seekers to buy FNMA's bonds, so the question we're still ignoring here is why so much pressure exists to buy these "securities"? Why are 10 year Treasuries trading at historic highs? Apparently, someone out there wants the rent badly and can't find anything else more attractive. That's the issue. We can't understand this phenomenon by focusing exclusively on the CDO sellers and ignoring the CDO buyers.

Free Will Hunting September 29, 2008 at 5:56 pm

There should be no bail out. There never should have been a bail out for Bear Stearns. All this does is give large companies more incentives to make unsound financial decisions, knowing that if they do, nothing will happen.
Too big to fail is such BS. How can you be too big to fail? That means you can do whatever you want and make crap decisions and pay no consequences. You do realize that because they are “too big to fail” means that when they do American Tax payers have to pay the bill for it. Not only in the short run of higher taxes, but in the long run with depreciating dollars! If that is not a joke, I have no idea what is. Let them fail; let the economy burn off all the excess fat of over production and over consumption. A massive realignment of capital needs to take place and it needs to happen now.
People want a fix, but want none of the hurt that comes with the fix.
This is not just the banks problem for overselling loans, but the people who took the loans. People who accepted ARM’s who can’t pay when the interest rate increased should lose their house for being incompetent or greedy. Not everyone can live like the Jones. People who can’t afford what they own, living off credit, need to be taught a lesson.
Go back to a backed currency; increase the amount that banks need to keep in reserves. Fiat currency is killing America and depreciating the dollar. Fractional Reserves allow for too much money to be lent by banks. We are turning into Post WWI Germany.
More Government = Less Freedom.
-From a guy who lives in a $300,000 single family home with a fixed rate mortgage, driving an old Honda accord, using coupons for groceries, shopping at Wal-mart investing in Gold, who push mows his lawn, because he knows he can’t afford a $750,000 house, two BMW’s, a Lexus, a country club membership, and Armani suits, with a depreciating 401-K a riding lawn mower to mow ½ acre… and why would I want to be? I plan on leaving something for my kids, not just my impressing my neighbors with how much debt I can accrue with hopes of sell my house and make a buck.

perilun September 29, 2008 at 6:03 pm

Good, glad it failed, I still don't know why this bill is needed. If this is an issue for the real economy then:

1. FDIC is what matters, lets do some more Wamu style deal or wait for the assets in bankruptcy and let the FDIC work it vs Paulson

2. Where is the evidence the "credit crunch" it hitting Main St (vs the Recession or being tapped out). Are small business Lines of Credit being frozen or taken back?

3. No wonder the interbank rate is super high, the fed pumped up spread is high (so hold that money yourself, riskless) and we don't know bank will fail on the other side of an interbank deal – so charge a big premium.

So, it really looks like a Wall Street bailout, and even if there is a real issue with Main Street, let set up an new fed mega bank to make those loans and give the banks a competitive reason to lend (or let them fail).

P.S. Love the podcasts! (except that one with Shiller)

Methinks September 29, 2008 at 6:03 pm

That's exactly what they look like. And guess who is buying them – idiots like you.

Chris September 29, 2008 at 6:30 pm

Free Will Hunting –

Do you really believe that the government buying a number of Mortgage-Backed Securities is going to mean that the companies won't learn their lesson? It seems to me that the folks at Wachovia, Bear Stearns, Lehman Bros., Washington Mutual, AIG, Freddie & Fannie and Merrill Lynch have all learned some pretty huge lessons. Those lessons will not be severely diminished if they're able to sell assets at 25 cents on the dollar to the gov't instead of the 2 cents that they're worth now.

The ones who I'm worried about not learning are homeowners who made really dumb bets on housing prices continuing to rise. If they are bailed out, they may just do it again. The financial institutions probably won't let them do it with their homes, but there's nothing stopping them from doing it with something else.

sethstorm September 29, 2008 at 6:32 pm

There are a multitude of more prudent companies that will jump at the chance to hire the talent that used to work at AIG & others.

That presumes no existing prejudice or penalty on a citizen. That also presumes that the cost of switching is also low. On both counts, there are prejudices and penalties against US citizens of many professions. Another point is that there are only so many slots at any single time to fill.

As a bit of a lighter note:
For once in a while, someone decides to clip the angel wings of Wall Street. It's been quite a long time since Main Street has attained any victory over Wall Street.

David Duncan September 29, 2008 at 6:33 pm

As a young man, I made spending money cleaning houses that had been financed through (what I think was) the HUD 235 program. The program was supposed to promote home ownership, basically (as I remember it) by encouraging low-downpayment loans. I well remember that the presidnt of the S&L for which I worked had commented beforehand that the program would be a disaster because the borrowers would walk when the value of the house declined below the balance of the loan. He said it would be "as simple as that."
I remember one whole street in Garland, Texas where every house was vacant. It looked like a plague had struck. Every lot was overgrown with weeds two feet high and the insides of the houses stank with rotting trash and molding mattresses and refrigerators. I bought a snow shovel and backed my pickup to the front door to expedite the cleaning. I don't know how many refrigerators, stoves, mattresses and sofas I hauled off.
Months later , however, I was impressed about how it was not a total disaster because those same houses had been bought and renovated by people who took advantage of lower house prices.

Methinks September 29, 2008 at 6:33 pm

Where is the evidence the "credit crunch" it hitting Main St (vs the Recession or being tapped out). Are small business Lines of Credit being frozen or taken back?

Yes. Or their borrowing rates are going higher. However, the bailout isn't likely to prevent that from occurring since credit spreads have been at historical lows until recently. Start-ups are having a very tough time finding loans and businesses which are dependent on leverage (like trading firms) are going to see it cut quite significantly. However, that's also going to happen with or without a bailout.

Methinks September 29, 2008 at 6:37 pm

As a bit of a lighter note:
For once in a while, someone decides to clip the angel wings of Wall Street. It's been quite a long time since Main Street has attained any victory over Wall Street.

I beg to differ, Sethstorm. When Wall Street provided a market for ABSs it provided a market for loans extended at extremely slim credit spreads. Main Street was the beneficiary of these loans and Wall Street was not being adequately compensated for the risk of lending, so Main Street has been winning over Wall Street for the entirety of the credit bubble.

Bret September 29, 2008 at 6:55 pm

Chris wrote: "The ones who I'm worried about not learning are homeowners who made really dumb bets on housing prices continuing to rise."

Those are smart (if immoral) bets. If you have no money (let's say you're young and haven't had time to save much yet) and someone allows you to make a highly leveraged bet with virtually no skin in the game, why not take it? If housing prices go up, you're golden. If they go down, walk away from the bet and try again later.

What's the downside?

Unit September 29, 2008 at 7:04 pm

I'm glad to bail-out was shot down! Pfew..for now. But I agree with Methinks: everyone was speculating (whatever that means) that house prices were going to go up, especially the Main Street folks that were borrowing variable rate mortgages with no money down…

sethstorm September 29, 2008 at 7:10 pm

The reasoning behind what I said is that Wall Street felt profound and visible pain. They found out what it was like to ask for government help and be denied it.

brotio September 29, 2008 at 7:22 pm

LMAO @ "load it before clean it"! :p

Thanks for the laugh of the day, Methinks.

muirgeo September 29, 2008 at 7:51 pm

Main Street was the beneficiary of these loans and Wall Street was not being adequately compensated for the risk of lending, so Main Street has been winning over Wall Street for the entirety of the credit bubble.

Posted by: Methinks

Wow… incredible…. stunning…. ginormous arrogance. Only a Wall Steerter could say such a thing. Man greed might make you filthy rich but after that it sure doesn't seem to have much to offer. That's a muirpity if I ever saw one. Yeah maybe you should join Phil Gramm as one of McCains campaign advisors. I'm sure this little blip would go over real good on a stump speech. Did you have a ruff day over their on Wall Street today or what? Tooo bad.

The Storm September 29, 2008 at 7:55 pm

Now lets repeal Sarbanes-Oxley and do something right…….

Oil Shock September 29, 2008 at 8:33 pm
indiana jim September 29, 2008 at 9:54 pm

This is too close to the election to discount the incentive of politicians to seize upon a smoldering house, call it a crisis and try to have us all collectively jump out of the fourth floor window. Rubbish!

The People's House showed us a glimmer of hope; tomorrow if they move in the direction of legistlation that will begin to address the root causes of this crisis, Pelosi, Frank, Reid and their ilk might be unmasked for the grasping fear mongers they truly are.

The anti-market rhetoric has reached a fevered pitch amoung the chattering classes and fatuous politicians. Make no mistake about it this is not a failure of markets, it is a failure of government. The subsidies to home ownership are perversions of markets via goverment, as are Fanny and Freddie, as are "mark to the market" acconting rules. Let the House speak to these, and I'll be glad that I'm still long in the market.

Flash Gordon September 29, 2008 at 10:32 pm

Perhaps the decline on Wall Street today proves that the bailout is a bad idea. If Wall Street wants more socialism and less free market capitalism the people and their representatives would be crazy to give it to them.

Oil Shock September 29, 2008 at 10:45 pm

Another fantastic article on why the credit pyramid should be allowed to collapse.

Excerpts….

The rationale for intervening always seems to centre on the fear of reliving the Great Depression. If we let too many institutions fail because of insolvency, we are being told, there is a risk of a general collapse of financial markets, with the subsequent drying up of credit and the catastrophic effects this would have on all sectors of production. This opinion, shared by Ben Bernanke, Henry Paulson and most of the right-wing political and financial establishments, is based on Milton Friedman’s thesis that the Fed aggravated the Depression by not pumping enough money into the financial system following the market crash of 1929.
It sounds libertarian enough. The misguided policies of the Fed, a government creature, and bad government regulation are held responsible for the crisis. The need to respond to this emergency and keep markets running overrides concerns about taxing and inflating the money supply. This is supposed to contrast with the left-wing Keynesian approach, whose solutions are strangely very similar despite a different view of the causes.
But there is another approach that doesn’t compromise with free-market principles and coherently explains why we constantly get into these bubble situations followed by a crash. It is centered on Marx’s Proposal Number Five: government control of capital.

Rudy September 29, 2008 at 11:00 pm

It's not a matter of if it'll pass, unfortunately it's when.

Free Will Hunting September 29, 2008 at 11:12 pm

-Chris

“Do you really believe that the government buying a number of Mortgage-Backed Securities is going to mean that the companies won't learn their lesson? It seems to me that the folks at Wachovia, Bear Stearns, Lehman Bros., Washington Mutual, AIG, Freddie & Fannie and Merrill Lynch have all learned some pretty huge lessons. Those lessons will not be severely diminished if they're able to sell assets at 25 cents on the dollar to the gov't instead of the 2 cents that they're worth now.”

Yes, I do.
When the government subsidizes imprudent behavior, we see more of it. Those companies and CEO’s may have learned their lesson, but what about the ones of the future? They have no incentive to produce prudent fiscal policies because the government will bail them out, when they fail. Do you not understand that point or do you disagree?
Why would you think it is smart to buy something for 25 cents when it is worth, as you stated, 2 cents, especially with tax payers money? Sound investment, or grossly uneducated? If sound investment is you claim, I have 2 cents to sell you for your 25 cents, in matter of fact I will give you that same deal 700 billion times.

“The ones who I'm worried about not learning are homeowners who made really dumb bets on housing prices continuing to rise. If they are bailed out, they may just do it again. The financial institutions probably won't let them do it with their homes, but there's nothing stopping them from doing it with something else.”

I made this point right here…
“This is not just the banks problem for overselling loans, but the people who took the loans. People who accepted ARM’s who can’t pay when the interest rate increased should lose their house for being incompetent or greedy. Not everyone can live like the Jones. People who can’t afford what they own, living off credit, need to be taught a lesson.”

And right here…
“From a guy who lives in a $300,000 single family home with a fixed rate mortgage, driving an old Honda accord, using coupons for groceries, shopping at Wal-mart investing in Gold, who push mows his lawn, because he knows he can’t afford a $750,000 house, two BMW’s, a Lexus, a country club membership, and Armani suits, with a depreciating 401-K a riding lawn mower to mow ½ acre… and why would I want to be? I plan on leaving something for my kids, not just my impressing my neighbors with how much debt I can accrue with hopes of sell my house and make a buck.”

Thanks for reading the whole post.

Unit September 29, 2008 at 11:15 pm

Flash Gordon,

have you read "The player" by Dostoevsky? Would you give 700B to a person addicted to gambling?

Free Will Hunting September 29, 2008 at 11:19 pm
Oil Shock September 29, 2008 at 11:22 pm

“Do you really believe that the government buying a number of Mortgage-Backed Securities is going to mean that the companies won't learn their lesson? It seems to me that the folks at Wachovia, Bear Stearns, Lehman Bros., Washington Mutual, AIG, Freddie & Fannie and Merrill Lynch have all learned some pretty huge lessons. Those lessons will not be severely diminished if they're able to sell assets at 25 cents on the dollar to the gov't instead of the 2 cents that they're worth now.”

If indeed markets are really incapable of resolving such situations like our current crisis, and the politicians & bureaucrats are superdudes who are capable, then, shouldn't we just leave the whole thing to the politicians and bureaucrats, even when the economy is not in a crisis?

Unit September 29, 2008 at 11:51 pm

Sorry I meant "The Gambler" by Dostoevsky (I was translating from another language…)

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