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10.01.2008 0

Bailout for Big Government?

  • On: 10/23/2008 11:53:46
  • In: Economy
  • “The core of the bill is we give the Secretary of the Treasury $700 billion to buy up bad loans all over the world… And frankly, I believe ‘all over the world’ is more the motivation than the local bank, because I think the—this is just my theory, so I’m not passing around as fact—but I think China and Saudi Arabia are holding a lot of these securitized mortgages. And I think they’ve basically said they’re not going to loan us any more money until we buy them back. And if they don’t give us loans every day, we default on our loans [because] we have so much debt as a nation. So, we’re going to borrow more money to try to make this situation right. There’s nothing else for me, Mark, that explains the urgency in using a sledgehammer to fix something that most of us know a few screwdrivers could fix.”—Senator Jim DeMint (R-SC), “The Mark Levin Show,” October 1st, 2008.

    Senator Jim DeMint has a theory about the real motivation for the proposed $700 billion financial bailout bill: The federal government has been threatened with defaulting on its own loans if it does not buy back the mortgage-backed securities that have been sold to central banks, private banks, and investors around the world.

    If the Senator is right, there is more to the bailout than meets the eye. And it could be not that individuals or businesses are necessarily having a hard time getting credit, but that it is the federal government that is having a hard time getting credit. Some $1.83 trillion of the national debt is coming due in the next year.

    Ultimately, it means that at the root of the crisis is misguided government policies—the Federal Reserve’s easy money policy, the mandatory loose lending policy of the CRA and the 1995 Clinton administration regulations, the so-called Enron accounting rules that forced companies to undervalue their assets, the nationalization of the mortgage industry via Fannie Mae and Freddie Mac, the excessive deficit spending annually, etc.

    Why should the American people support a $700 billion bailout that does not reform a single one of those errant policies?

    And who could blame our creditors overseas for not wanting to lend to a government that has been so dysfunctional? The national debt has exploded to gargantuan levels. In March the debt ceiling was $9.4 trillion. With the new proposal it will rise to over $11 trillion.

    The national foreclosure rate has shot up to over 6 percent, and home values are still dropping, which analysts suggest increases the pain felt in markets. This makes ever-riskier the mortgage-backed securities that were sold all over the world by banks, but mostly by Fannie Mae and Freddie Mac, the now-defunct mortgage giants. Those particular securities were sold—all over the world, as noted by Senator DeMint—with the implicit backing of the U.S. government.

    Now that the securities are going sour, it’s time for the federal government to make good on that backing—or else. Or else what?

    On the surface, the $700 billion proposal is being billed as a means of unclogging the financial markets and increasing liquidity. This would in theory help everybody—individuals, businesses, governments—continue their lines of credit. No bailout, say the proponents of the legislation, and that credit will dry up, and the economy will grind to a halt. Main Street will be hurt, they say.

    On the other hand, if Mr. DeMint is right, while the economy may be in grave danger—including Main Street—it may be because the government can no longer afford to meet its own debt obligations. It will be because the government has spent far beyond its means.

    The purchasers of the sinking mortgage-backed securities, then, would also be the creditors who are helping America to pay off the national debt.

    Without their help, the U.S. government will default. What happens after that is anyone’s guess. But it’s probably safe to say that the Congress should consider carefully taking Mr. DeMint’s advice about how to fix the problem by addressing the root causes of the crisis—those errant government policies that have brought the global financial system to its knees. As Mr. DeMint said on the floor of the Senate on Wednesday:

    “We are telling people not to worry because we are going to rescue them with their own money. Congress is going to allow the Treasury Secretary to take $700 billion from taxpayers to buy bad loans and investments from anyone he chooses anywhere in the world. This, we say, will free up capital, get the credit markets working again, and put our economy back on track.

    “But this Congress refuses to change our Nation’s monetary policy that created the cheap money and inflated the housing bubble. We refuse to change the accounting laws and regulations, even though they are making the problem worse. We refuse to lower capital gains and other taxes to attract capital and promote growth. We refuse to repeal Sarbanes-Oxley, even though it hasn’t worked and it has cost our economy billions. And we refuse to expedite the development of America’s energy resources, even though it would help every American and grow our economy.

    “None of these things are even on the table for discussion. We are telling the American people to hand over $700 billion or the world economy is going to collapse. This is why people are so upset. It is because Congress is being dishonest and arrogant. We are not being honest with them about how we got into this mess, and we are not being honest with them about what we need to get out of it.”

    Unless that happens, the bill now in Congress is definitely a “no” vote. Therefore, Americans for Limited Government—for the sake of liberty and the American way of life—calls upon Congress to defeat the $700 billion bailout and go back to the drawing board. The credit system can be unclogged with taxpayer funds, but the taxpayer must be assured that this will never happen again.  The current bill fails to do that.

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