August 31, 2010

THE BUSINESSMAN IN THE OVAL SAVED THE ECONOMY...:

The Failure of the Liberal Economic Experiment? (James K. Glassman, September 2010, Commentary)

Government played two distinct roles during and after the crisis. The first was shoring up shaky financial institutions. On March 24, 2008, the Federal Reserve Bank of New York issued JPMorgan Chase a $29 billion non-recourse loan that allowed it to buy Bear Stearns, an investment bank on the verge of collapse. Six months later, the Fed provided $85 billion (more came later) to save AIG, the insurance giant with assets of more than $1 trillion. Congress then enacted the comprehensive Troubled Asset Relief Program, or TARP, which authorized loans and equity purchases for hundreds of institutions (mainly banks but also auto companies).

By June 30, 2010, the U.S. Treasury had disbursed $386 billion in TARP funds. Another $145 billion went to keep afloat the two government-sponsored (though ostensibly private) institutions that provide lenders with mortgage money, Fannie Mae and Freddie Mac.

How did all that work out? The Bear Stearns, AIG, Fannie Mae, and TARP dispositions were far from perfect. Robert Pozen argues in his book Too Big to Save? that too much of the federal money injected into AIG was used to bail out banks—many of them foreign—that AIG had insured against mortgage losses through credit default swaps. Those banks, he writes, could have taken a -severe haircut without jeopardizing the global financial system. Also questionable was giving General Motors and Chrysler more than $80 billion (though President Bush acted honorably in keeping the automakers alive until the start of the Obama administration.) A good case can be made that automakers should have been allowed to go bankrupt through the normal legal process, with their assets passing from weak hands to strong. As for Fannie and Freddie, had perfectly sensible warnings from experts like Peter Wallison been heeded, they might not have collapsed at all, and the entire subprime-mortgage meltdown might not have occurred. So far, Congress and the president have simply kicked the Fannie-Freddie can down the road, delaying a long-term solution.

Overall, however, it has to be said that the TARP and the other financial rescues were necessary and -efficient. The global financial network did face systemic failure, mainly because of a lack of liquidity, or cash to meet immediate demands. The U.S. government was able to provide that liquidity, using its authority as lender of last resort, and most of the direct beneficiaries could eventually repay their loans, with interest, as they recovered. In fact, within a year and a half after the TARP was launched, the Treasury had been repaid $211 billion—or more than half what it had put out.

The second role government played, however, was far more questionable. Instead of lender of last resort, it determined to be the spender of last resort. And this decision, more than any other, is what has led to the crisis in the liberal economic experiment.


...the intellectual has retarded it.

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Posted by Orrin Judd at August 31, 2010 8:40 PM
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