Flogged by the punditocracy as an absolute necessity to save the economy, the ink had barely dried under Pelosi's fingers before it became clear that the bailout would not stop continued declines in an economy that is now more than a year into its deepening recession. The slowdowns across the housing sector, which started back in 2006, continued this week, and Labor announced 159,000 fewer jobs, the largest job loss in five years. Ingraciously, stocks failed to rally upon passage of the bill, taking another jolting dive instead.
The bailout package may turn out to be not so much a step towards recovery as another big step down the same road that got us into this mess in the first place. The basic idea that we can throw money at the problem, while charmingly American in its simplicity, may lead instead to a devalued dollar. New provisions reportedly added to garner Republican House votes authorize the SEC to suspend regulations requiring companies to report the market value of assets on their balence sheets. Because things we don't know, we can't talk about. And if we don't talk about it, it will just go away. Or something like that.
James Grant, in a Washintgon post column dated tomorrow, nails the point.
Low interest rates, easy money and malleable accounting rules are what plunged Wall Street into crisis. Yet it is low interest rates, easy money and malleable accounting rules that top the list of federal fixes. The unifying theme of the new bailout bill, all 451 pages of it, is the hair of the dog that bit you.He is especially skeptical of the move to immediately stop telling the public how much things are, or are not, worth.
So, what is to be done? Well, first of all, let's start doing a lot of things differently. It is time for more transparency, not less. More accountability, not less. And a regulatory structure that provides real incentives for managing risk effectively at every level of our economy--from the average family to the local business to the bank.
Prices can be unwelcome pieces of information. When an especially unwelcome batch wells up after a financial collapse, governments try to quash it. So it is today. The SEC has suppressed short selling. The bailout bill will open the door to the suspension of market-value accounting. The Fed is moving heaven and earth to cheapen the value of the dollar.
Long after the crisis burst into the open, the Fed and Treasury downplayed it. It was, they insisted, "contained." Last week they asserted that, unless the House voted "yea," the wheels would come off this $14 trillion economy. President Bush himself has broadly hinted that the nation is on the cusp of disaster.
How can they be so sure? And how can they know that the unintended consequences of the radical policies they are pushing through won't be worse than the panic that they themselves are helping to foment? When the Fed insists it has no choice but to print up hundreds of billions of new dollars and when the keepers of accounting standards bend in the face of criticism that market prices hurt, what they are really saying is the that financial truth is too awful to bear. Heaven help us all if they're right.
There are models for such effective regulatory approaches. Interestingly, the first model may well be the much maligned Community Reinvestment Act--now taking center stage as the new punching bag for free marketers looking for someone besides themselves to blame. Thanks to Barry Ritholz over at The Big Picture for this quick takedown of that absurd line of reasoning.
But there's an aspect of the CRA that has been essential to its success that he fails to mention. Banks made good loans to good people in underserved markets in large part because the CRA required public reporting of lending patterns and encouraged people in local communities, informed by the data it made available, to participate in the regulatory process and make sure their needs were served.
Contrast that with this:
On April 28, 2004, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks....
On that bright spring afternoon, representatives from the investment banks asked the S.E.C. to exempt their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments.
Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.
According to the Times, only one member of the public commented on the proposal, a risk management expert from Indiana, who wrote a two page letter opposing the change and never heard back from any regulator. The meeting was sparcely attended. No major media covered it. So much for taking our cues from the industry we need to regulate, and doing so without a real public debate. It gets us a mortgage crisis, followed by an economic crisis, followed by a taxpayer bailout. Let's not let it be followed by more of the same.