Reflections on the Financial Bailout

I am probably coming to this party too late to have much fun, and joining the conversation too late to add anything meaningful. And I am a layman when it comes to economics. But it continues to be big news whether in the newspapers, on the Internet, or during presidential debates. And I think I needed a little bit of time to look around and simply watch before adding my two-cents worth.

First a few links... This article from World Magazine is probably still the best quick-and-easy overview of what went wrong. This article from The American Scene is also helpful because it weighs out the pros and cons of a bailout plan, but it is a little more technical. For a more entertaining account that is simplified but still helpful, see this article from National Review Online and this follow-up. For the most intelligent (but fairly technical) commentary on crises and bailouts that I have found, take a look at the Becker-Posner blog, where two world class economists give their analysis and do not always agree with each other.

And now a few observations... Perhaps was has struck me most forcibly about the discussion surrounding the crisis and bailout is the woefully underinformed and reactionary state of most public opinion. Whether in conversations at the store or in a church, whether in letters to the editor or comments following a Web-based article, many responses betray a lack of understanding of how the U.S. economy works. After the first bailout package was rejected in the House of Representatives, reader comments at both the Wall Street Journal and the Washington Post (intentionally chosen for their differing political inclinations) were almost uniformly negative regarding the bailout and gleeful regarding its rejection, for the most part arguing that Pennsylvania Avenue and Wall Street had attempted to pin the cost of their mismanagement on Main Street, and throwing around the number $700BN as if the IRS were going to show up on our individual doorsteps requesting a check for our portion of the bailout within the week, with no hope or recouping the money. Now I might be able to understand opposition to a bailout, but at least have better reasons for it than that, and try to comprehend the consquences for both Wall Street and Main Street of letting major financial institutions fail.

The second observation I would offer is that neither the mainstream media nor the government has helped on the whole in understanding what has happened and why a bailout might be necessary. For example, on Monday my family went out for lunch to a restaurant that had TVs tuned in to CNN. As the Dow "plunged" below 10,000, it seemed that CNN was doing everything possible to make a bigger story out of it than was necessary, including soliciting feedback from viewers on Twitter and Facebook. One viewer's comment especially piqued my interest because he was in a panic over what he should do with his daughter's college savings fund. (The short answer to that concern, unless his daughter is leaving for college in the next year, is to do nothing out of the ordinary. This is a market correction. It is the way the system works. Gains are never guaranteed, especially in the short term. Ride it out.) My wife, whose undergraduate degree is in economics, was growing frustrated with the coverage until CNN had an economist on to discuss the situation, who promptly criticized CNN for the way they were promoting fear and misinformation.

To be fair, this is not meant to target CNN's coverage. Fox and MSNBC have been just as irresponsible. And the administration did an incredibly poor job of selling the bailout to the average voter and taxpayer. It seems to me that good information has been as difficult to come by for the public as liquidity of funds has been for banks.

And now for my two cents. It seems to me that some sort of bailout was necessary and important not only for Wall Street but for Main Street. We can gripe about tax dollars stuffing the pockets of irresponsible executives, but when business owners need loans and cannot get them, or responsible borrowers who are first time homeowners cannot get a mortgage, then the griping will simply shift in content. And many opposed to government assistance now will want government assistance then. The key issue is liquidity, something which the alternate plan proposed by the House Republicans did not sufficiently address.

If I were to defend my position here, I would end up cutting and pasting the arguments of others. Go to the links listed above -- they present the case as well as I could.

So there is one cent. Now for the second. It also seems to me that there is widespread sidestepping of personal responsibility in this mess. We can discuss whether lenders were irresponsible with subprime mortgages. We can discuss whether Freddie and Fannie were irresponsible in buying these mortgages. We can discuss the difficulty of properly fixing the value of securities and the wisdom of then using them as capital to enable more borrowing. We can ask economic questions about moral hazard and government intervention. There is plenty wrong with the way things played out over the past few years. Everyone seems to agree on that.

What about those who did the borrowing? I know I run the risk of giving offense here. I understand the desire to own a home and the advantages of home ownership. But if the only mortgage you could get was an ARM or payment option or Ninja loan, should you take on that kind of debt? The assumption made by many to justify this kind of borrowing was that housing values would continue to go up. But I have to wonder if it is wise to take on the massive amounts of debt associated with a mortgage when you lack the ability to pay it off.

I cannot help but throw in a third cent as well. Where is God in all of this? Isaiah 45:7 teaches us that the Lord brings both good and calamity. All the treasures of the earth belong to Him, and nothing happens that is contrary to His knowledge and plan. Both the initial panic and the current sense of brooding despondency that I pick up here in the New York area, from Christian and non-Christian alike, suggests to me that we believe what God attests about Himself in Scripture to be true more often in the breach than in the observance. Or another way of looking at it is to observe that we are often more ready to declare God's sovereignty when "it" affects someone else rather than us (whatever "it" may be), but that when "it" meddles with our plans and crushes our dreams God's sovereignty falls from our consciousness.

This article from the Desiring God blog was a helpful reminder to me of the need to pray for our country's leaders, both political and economic. But even more useful to me in keeping my head, as I have too have investments that have been affected, is to remember the teaching of Jesus in Matthew 6, especially vs. 30-33: "But if God so clothes the grass of the field, which today is alive and tomorrow is thrown into the oven, will he not much more clothe you, O you of little faith? Therefore do not be anxious, saying, ‘What shall we eat?’ or ‘What shall we drink?’ or ‘What shall we wear?’ For the Gentiles seek after all these things, and your heavenly Father knows that you need them all. But seek first the kingdom of God and his righteousness, and all these things will be added to you."