Your house isn’t worth as much as you’d like it to be.
That’s probably no surprise right now. Maybe it’s unkind to rub it in. But a harsh appraisal has been one simple bit of reality to hold onto amid the frenzied, hysterical, high-pitched panic that seized leaders of government, business, and finance throughout 2008. In less than a year, vast swaths of American finance have been effectively nationalized, and the “Washington consensus” of more-or-less free market economics has come under the kinds of attacks not seen in a generation.
Why did this happen? Because your house was overvalued. It probably still is. But the watchmen of capitalism have chosen this time to act on a strange new form of economics. According to the new thinking, the value of an asset—even or especially an asset universally viewed as overpriced—must not be allowed to decline. This kind of economic intelligent design, endorsed by Republican and Democrat alike, even holds that a price decline cannot be a rational outcome in a competitive environment. Rather, it must be evidence of “market failure.”
Asking prices for homes since the June 2006 real estate peak have declined about 15 percent, according to the Office of Federal Housing Enterprise Oversight. Other indexes put the decline closer to 20 percent. The panic of the nation’s elite, however, has been a gauche and amateurish 100 percent. At the beginning of 2008, the financial market was doing largely what it was supposed to do: reflecting changes in economic conditions, weeding out bad borrowers and lenders alike, rewarding the patient, punishing the rash, learning from error. But the cascading bailouts of investment banks, insurance companies, government-sponsored enterprises (GSEs), and commercial banks have replaced that relatively hands-free process with a new system in which decision making is centralized, reality is made to conform to political perception, irresponsible behavior is rewarded, and Washington technocrats decide who gets free money and how much houses should cost.
The federal economic seizure of 2008 is the most serious challenge to free enterprise since the Soviet era. It is far more grave than the Dow Jones Industrial Average’s 40 percent decline from its October 2007 peak of 14,164 points, or the extinction of Wall Street’s five largest investment banks. The bailout throws good money after bad in the credit markets, paves the way for every too-big-to-fail institution in the country to dump its bad luck and bad decisions on taxpayers, and turns “moral hazard” from an academic term into the prevailing economic paradigm. No surprise, then, that big-government liberals such as Slate Editor Jacob Weisberg are using the crisis to celebrate “the end of libertarianism.”
It would be tempting to channel the Milton Friedman–bashing Canadian penseuse Naomi Klein and pretend the advent of Disaster Socialism was enacted according to some shadowy plan. But the evidence points to a simpler, and ultimately more troubling, theory. Lame duck Treasury Secretary Henry M. Paulson, Federal Reserve Chairman Ben S. Bernanke, and President George W. Bush are not conspirators. They’re just male hysterics. When put to the test, their support for free markets fell short.
Don’t Bail These People Out
Their confidence in the American people fell even shorter. Along with a Democratic Congress and a hyperventilating press, Bush and his financial team didn’t think Americans could stand to wait a few years before unloading that white elephant of a house. The idea that a nation formerly celebrated for its fortitude might be able to scrimp and save through an economic downturn (one that in most regions of Earth would look like a boom by comparison) was alien to them.
But in assuming that we were panicking, Bush’s team appears to have been wrong: The 2008 economic interventions were in fact extraordinarily unpopular, foisted by politicians, business leaders, and the mainstream media onto a public that vociferously opposed them at every step. Mistaking the pressure of a national election and a historically unpopular presidency for a mandate, Paulson, Bernanke, Securities and Exchange Commission Chairman Christopher Cox, and others have begun a sweeping takeover of the private instruments of finance.
Major steps included the $400 billion Federal Housing Finance Regulatory Reform Act (passed by Congress and signed by President Bush in June, after 20 days of debate), the $700 billion Emergency Economic Stabilization Act (signed in October, after less than two weeks of debate), the Federal Reserve’s swallowing of the $6 trillion GSEs Fannie Mae and Freddie Mac in September, a host of new federal guarantees against losses, and countless government-brokered “rescues” of ailing financial firms. The scope of the change is beyond ready comprehension.
In this, Paulson & Co. have been applauded by the mainstream media, both major political parties, both presidential candidates, and many stock market pundits. Throughout bailout season, however, the unpopularity of these efforts continued to be both remarkable and little remarked on.
In an October Fox News/Opinion Dynamics poll, 53 percent of respondents said government involvement was “not part of the solution at all.” Around the same time, a Los Angeles Times/ Bloomberg survey found 55 percent opposition to a government-funded bailout. A full 77 percent of respondents told CNN/Opinion Research that the bailout would primarily reward those responsible for the downturn.
Those majorities were notably catholic in their distribution across social types and party affiliations. Asked if the September-October crisis was “a good time for higher taxes and a larger government or…a good time for lower taxes and a smaller government,” two-thirds of Democrats chose lower/smaller in the Fox News poll. Nearly equal numbers of Democrats and Republicans thought the bailout would have either little or negative effect. Call-in radio, blogs, and any other media outlets allowing serious levels of user feedback demonstrated the degree to which white and black, left and right, owner and renter, rich and poor all hated the bailout.
That moment of public bipartisanship—an almost exact mirror of the political bipartisanship with which the bailout was rushed into law—neatly repeated another futile popular groundswell against federal intervention from earlier in the year. The Federal Housing Finance Regulatory Reform Act of 2008 should have been an easy sell, since it purportedly aimed to assist homeowners, a more popular (or at least more sentimentalized) subset of Americans than greedy Wall Street tycoons. But even there voters balked. Polls early in the year that specifically tried to gauge support for bailing out homeowners found the public opposed by nearly a 2-to-1 margin. Rep. Kevin McCarthy R-Calif.), whose district has one of the highest foreclosure rates in the country, nonetheless noted at the time that his constituent mail was running “50 to 1: ‘Don’t bail these people out.’ ”
On the few occasions when elites did take note of public opposition to all these market interventions, it was generally in the service of deriding or psychopathologizing popular opinion. During a December 2007 meeting with Paulson, my (private-sector) colleagues and I at the Los Angeles Times apparently surprised the treasury secretary by expressing doubt about his mortgage rescue package. His response: “I see I’ve got a skeptical group here. It’s amazing: I’ve spent my life in the private sector, and it’s amazing how many people I’ve met who’ve never spent a day in the private sector who think any kind of government involvement is somehow hurting [the] market.”