September 30, 2008


So, to me, it seems abundantly clear that the Democrats don’t see the current situation as a crisis, and are acting like everything is business as usual. To me, that says — far more clearly than their words — that they don’t think things are anywhere as bad as they say they are.

And that is what convinces me that things are far worse than they think.

Because the Democrats have been consistently wrong on the whole situation, and have been for years. There is no end of videos of leading Democrats praising Fannie Mae and Freddie Mac’s stability, of their performance, defending the leaders (most notably Franklin Raines and Jim Johnson), and thoroughly denouncing and scuttling numerous attempts to head off the problems that have started to come to a head in the past month or so.

It’s a kind of negative evidence, but it’s persuasive to me: the Democrats have a solidly established record of being utterly and completely wrong on the whole mess. They are now acting as if the situation isn’t so bad, and are still far more interested in playing their run-of-the-mill political games with the whole process. If they are still wrong (and the odds are highly in favor of that conclusion), then we are in real trouble and the bailout that they don’t seem to care about whether or not it passes is probably a necessary evil.

What’s scary is that it makes sense . . . .

Meanwhile, an important credit debate at IowaHawk.

UPDATE: Reader Richard Fairgrieve writes:

I am an investment manager based in London specializing in emerging markets. My wife is a financial jounalist for a major European business magazine who specializes in writing about asset backed securites like CDO’s & CDS’s. I’d like to make two comments about the current mess. The first is that she believes that since the credit problems emanate from the housing market there will be no stability in the financial system until their is stability in the housing market. Why not use the $700bn to provide increased tax relief on mortgages, help lower mortage payments for those under threat of foreclosure (a foreclosed house rapidly falls in value) and take other steps to shore up house prices? From a free market economic point of view this may not be the optimal solution but it seems to me a lot more palatable then giving more power to the Treasury for a program that is at best opaque and ordinary taxpayers find difficulty in seeing the benefit.

The second point I’d like to make is that markets, at least in theory, try to put a price on future events. Given the falls yesterday they are discounting a rapidly slowing global economy and the election of Obama. If you actually look at market action yeseterday, especially in commodities, it was not great even before the bill was passed. The markets are fearing that the impact of this crisis will be deep and global. Secondly, the results of the debate on Friday and the growing econmic stress are, according to the polls, allowing Obama to build his lead. An adminstration that undoubtedly will believe that the best solutions to the U.S. economic policies lie in Washington and revolve around higher taxes, more regulation and protectionism is bad for markets. Gotta run to work now and watch fear at work.

Yes, why not turn the mortgage interest tax-deduction into a refundable credit for a couple of years. Surely that would drastically reduce the default rate, wouldn’t it?

More thoughts on the bailout vote from Jeff Goldstein.