Bailout Politics & Penny-Wise Politics

Bailout Politics

Nothing could more painfully demonstrate what is wrong with Congress
than the current financial crisis.

Among the Congressional "leaders" invited to the White House to devise
a bailout "solution" are the very people who have for years created
the risks that have now come home to roost.

Five years ago, Barney Frank vouched for the "soundness" of Fannie Mae
and Freddie Mac, and said "I do not see" any "possibility of serious
financial losses to the treasury."

Moreover, he said that the federal government has "probably done too
little rather than too much to push them to meet the goals of
affordable housing."

Earlier this year, Senator Christopher Dodd praised Fannie Mae and
Freddie Mac for "riding to the rescue" when other financial
institutions were cutting back on mortgage loans. He too said that
they "need to do more" to help subprime borrowers get better loans.

In other words, Congressman Frank and Senator Dodd wanted the
government to push financial institutions to lend to people they would
not lend to otherwise, because of the risk of default.

The idea that politicians can assess risks better than people who have
spent their whole careers assessing risks should have been so
obviously absurd that no one would take it seriously.

But the magic words "affordable housing" and the ugly word "redlining"
led to politicians directing where loans and investments should go,
with such things as the Community Reinvestment Act and various other
coercions and threats.

The roots of this problem go back many years, but since the crisis to
which all this led happened on George W. Bush's watch, that is enough
for those who think in terms of talking points, without wanting to be
confused by the facts.

In reality, President Bush tried unsuccessfully, years ago, to get
Congress to create some regulatory agency to oversee Fannie Mae and
Freddie Mac.

N. Gregory Mankiw, his Chairman of the Council of Economic Advisers,
warned in February 2004 that expecting a government bailout if things
go wrong "creates an incentive for a company to take on risk and enjoy
the associated increase in return."

Since risky investments usually pay more than safer investments, the
incentive is for a government-supported enterprise to take bigger
risks, since they get more profit if the risks pay off and the
taxpayers get stuck with the losses if not.

The government does not guarantee Fannie Mae or Freddie Mac, but the
widespread assumption has been that the government would step in with
a bailout to prevent chaos in financial markets.

Alan Greenspan, then head of the Federal Reserve System, made the same
point in testifying before Congress in February 2004. He said: "The
Federal Reserve is concerned" that Fannie Mae and Freddie Mac were
using this implicit reliance on a government bailout in a crisis to
take more risks, in order to "multiply the profitability of subsidized
debt."

Chairman Greenspan added his voice to those urging Congress to create
a "regulator with authority on a par with that of banking regulators"
to reduce the riskiness of Fannie Mae and Freddie Mac, a riskiness
ultimately borne by the taxpayers.

Fannie Mae and Freddie Mac do not deserve to be bailed out, but
neither do workers, families and businesses deserve to be put through
the economic wringer by a collapse of credit markets, such as occurred
during the Great Depression of the 1930s.

Neither do the voters deserve to be deceived on the eve of an election
by the notion that this is a failure of free markets that should be
replaced by political micro-managing.

If Fannie Mae and Freddie Mac were free market institutions they could
not have gotten away with their risky financial practices because no
one would have bought their securities without the implicit assumption
that the politicians would bail them out.

It would be better if no such government-supported enterprises had
been created in the first place and mortgages were in fact left to the
free market. This bailout creates the expectation of future bailouts.

Phasing out Fannie Mae and Freddie Mac would make much more sense than
letting politicians play politics with them again, with the risk and
expense being again loaded onto the taxpayers.

http://townhall.com/columnists/ThomasSowell/2008/09/30/bailout_politic...age=ful
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Penny-Wise Politics

Congress is never more ridiculous than when it tries to look like it
is serious.

In the midst of a major national financial crisis, what was one of the
first things Congress zeroed in on? The pay of Chief Executive
Officers of financial institutions.

If all those CEOs agreed to work for nothing, that would not be enough
to lower the bailout money by one percent. Anyone who was really
serious would start with the 99 percent and let the one percent come
later, if at all.

But however insignificant the pay of CEOs is economically, it is big
stuff politically. Whatever the shortcomings of the Democrats, they
are consistent in their message, and class envy is a great part of
that message. [ the same message in the Communist Manifesto ]

People who say that they cannot understand how CEOs in general get so
many millions of dollars seem not to realize what a trivial thing they
are saying. Most people do not understand most things. But that is no
reason to have national policy guided by their ignorance.

I do not understand one percent of what there is to understand about
the very computer on which these words are being written-- nor about
the Internet on which these words will be transmitted to the syndicate
that distributes this column. I don't have a clue about how a
syndicate is run, much less how much someone should be paid for
running it.

What really sets some people off is the fact that a CEO who has
mismanaged some corporation into losing billions of dollars is
rewarded with a severance package worth millions.

Think about it. If the CEO's decisions are costing the company
billions, it is a bargain to get him out the door immediately for
millions, rather than having his departure delayed by either internal
struggles or battles in the courts.

It is the same principle if you are married to someone who is
impossible to live with. The divorce may cost far more than the
marriage-- and still be worth every cent of it.

But what about the "social justice" of it all?

Such questions seem to carry great weight with people who act as if
they are God on Judgment Day. But one of the little overlooked
differences between themselves and God on Judgment Day is that God
does not have to worry about what is going to happen the day after
Judgment Day.

Rewarding someone for being impossible to live with may offend our
feelings, just as rewarding someone for mismanaging a company does.
But the real question is-- what is the alternative and how will that
alternative affect the future?

Politically imposed limits on the pay of CEOs is one of the most penny-
wise and pound-foolish things that can be done. The difference between
a top-notch CEO and a second-rate CEO can be billions of dollars on
the bottom line.

That is what drives up the pay of CEOs. If you want someone who will
be top-notch in running organizations as huge and complex as Fannie
Mae or Freddie Mac, there is no point offering $5 million a year if
similar enterprises elsewhere are paying $20 million for people with
the kind of ability required.

Who is going to take a $15 million pay cut to go run these
enterprises, in addition to having to put up with politicians?

The money that can be saved by limiting CEO pay is chump change
compared to the money that can be lost because you cannot attract top-
notch talent.

Congress itself is a classic example of what can happen when penny-
wise policies restrict the caliber of people who can be attracted.

No top-level doctor, lawyer, economist, engineer or CEO can become a
member of Congress without taking a big pay cut, perhaps costing that
person's family millions of dollars over a lifetime.

On the other hand, if you paid every member of Congress a million
dollars a year, it would cost less than the cost of even a small
government boondoggle, much less a whole agency.

It is not that the turkeys in Congress today deserve a raise. They
don't even deserve their current pay. But that is the very reason for
attracting different people. Cheap politicians are actually very
expensive and the same principle applies to CEOs.

http://townhall.com/columnists/ThomasSowell/2008/10/01/penny-wise_poli...s?page=