Does It Take a Panic to Stop a Panic?

The Wall Street bailout and the perils of bipartisanship


"Without immediate action by Congress," President Bush warned last week, "America could slip into a financial panic." Instead Bush wanted a political panic. The only way to avert "a long and painful recession" in which "millions of Americans could lose their jobs," he said, was to send the Treasury Department on an unprecedented Wall Street buying spree.

But Treasury Secretary Henry Paulson was premature in thinking the administration's scaremongering had produced "a bipartisan consensus for an urgent legislative solution." A bailout bill that reached Congress on Monday, just 10 days after Paulson first proposed using taxpayer money to relieve financial institutions of their bad investments, was narrowly defeated in the House. Still, the specter of blind bipartisanship, which may yet prevail, should give pause to anyone who hopes electing a Republican president will curb the excesses of a Democratic Congress.

The issue has hurt John McCain in more obvious ways as well. The Wall Street bailout focused voters' attention on the economy, an area where, rightly or wrongly, they trust Barack Obama more.

McCain looked like a grandstanding doofus when, trying to gain a political advantage, he melodramatically "set politics aside" and rushed to Washington, where he vainly sought to broker a bailout deal. After saying Friday night's presidential debate would have to be postponed, for the good of the country, until an agreement had been reached, he discovered the country could spare him for a few hours after all and flew to Mississippi, where he achieved the bipartisanship that had eluded him in Washington.

"We are going to have to intervene; there's no doubt about that," said Obama. "We have to move swiftly." McCain sounded even more panicky, saying there's "no doubt about the magnitude of this crisis." Unless Congress does something to "fix the greatest fiscal crisis…in our time," he said, we will see "failures on Main Street, and people who will lose their jobs, and their credits, and their homes."

McCain added that "the first thing we have to do is get spending under control in Washington." Right after letting the Treasury Department spend $1 trillion on the crappiest assets it can find. (Rounding the number up seems reasonable given the arbitrariness of the official $700 billion estimate. "It's not based on any particular data point," a Treasury Department spokeswoman told Forbes. "We just wanted to choose a really large number.")

Neither candidate wondered whether government officials spending other people's money can realistically be expected to do a better job of valuing mortgage-backed securities than myriad investors with their own money on the line. Neither worried that government ownership of so many securities, including stock in financial institutions, would create conflicts of interest and encourage politically motivated market manipulation.

Neither said it was dangerous to rescue Wall Street firms from their own mistakes instead of letting the market punish them, or unfair to make taxpayers pick up the tab. Neither mentioned the problem of moral hazard, where the expectation of a bailout leads people to take risks they otherwise would avoid. Most fundamentally, neither questioned the premise that Congress had to choose between a recklessly rushed "solution" and economic catastrophe.

More than 100 economists signed a September 23 open letter warning Congress "not to rush," saying "a subsidy to investors at taxpayers' expense" is morally and economically problematic. "Fundamentally weakening [credit] markets in order to calm short-run disruptions is desperately short-sighted," they said. Three days later, 44 economists led by former House Majority Leader Dick Armey said the bailout plan "poses a significant threat to taxpayers while failing to address fundamental problems."

Instead of heeding these warnings, Obama and McCain listened to the likes of White House spokesman Tony Fratto, who said failing to approve the bailout by the end of last week was "unthinkable." "We have to get something done," one of the candidates insisted on Sunday. "The option of doing nothing is simply not an acceptable option," the other declared.

Who said what? Does it matter?

© Copyright 2008 by Creators Syndicate Inc.

NEXT: Don't Mess With the Pig, Young Man

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. The amazing thing to me is how powerful Bush still is, despite being unpopular, at the end of his term, and the other party controlling Congress. Everyone is dancing to Bush’s tune. He’s leading and McCain/Obama/Pelosi are following.

  2. Max, Bush isn’t powerful the money people behind Bush are powerful and they are blackmailing Washington politicians to get what they want.

    Yesterday, Rep Brad Sherman (CA) spoke on CNBC and stated that foreign banks will be one of the benefactors of this plan. (it’s very hard to find any coverag of this interview!)

    Our Banking Cartel (Federal Reserve) do not want to pay for their business mistakes. McBama & Co. have sold their souls to the highest bidder. Either that or they know we have already lost our freedom and they figure they may as well benefit.

    United States of America the land of the indentured servant.

  3. Time to beef up antitrust law. Cartels is right and it turns out that bigness does equal badness. You are seeing it right now loyal HitnRunners!

  4. By the way, where’s Phil Gramm when you need him?

    We’ve gone from a “mental recession” to a mental Great Depression.

  5. DavidW, the FDIC seems intent on creating a banking oligopoly. The big banks get sweetheart merger deals; outsiders (e.g. private equity) are not invited to the party.

  6. I’m getting rather pissed off at CNN and others describing this as the congress “failing” to pass a “rescue” bill. The way I see it, the house successfully defended the people from the second-biggest robbery attempt in history.


  7. Max, Bush isn’t powerful the money people behind Bush are powerful

    No. Pelosi and Reid are weaker than Near Beer. They are fucking pathetic.

  8. Again government will be responsible for creating monopolies. Soon we will only have 2 or 3 major banks in the US which the government helped to create. You can be sure they are now too big too fail and will require constant government support.

  9. Government is responsible for creating cartels by simple non-enforcement of the antitrust laws. The Fed’s bearing is a red herring. Time for some antitrust lawsuits and deconsolidation orders.

  10. This situation is much worse than if the government just took over the banks outright. This way it tries to make it look legit to those that favor a free market, and then they will get all huffy and think that they deserve the money they make off of it, and so will those that don’t follow these things closely. Alternately, it will still be hailed as a situation where there isn’t enough government oversight by those on the left.

  11. So, when is this “recession” going to begin? I have been hearing any-day-now/we-are-already-in-on on this board all year.


  12. The People have spoken: initiate tax cuts and deregulation NOW!

  13. Dave W.

    I am continually amazed at your ability to look at any issue and completely and utterly fail to grasp it. You are like George Castanza, a man who would bat 1000 if he would say the opposite of what he believes.

    Government is responsible for creating cartels by simple non-enforcement of the antitrust laws.

    Absent an enforcing mechanism to prevent new competitors from entering the field, cartels cannot significantly alter market prices. In other words, the only way a cartel exists is if it does not behave like a cartel.

    If a cartel tries to raise prices or limit production guess what happens? The first cartel member who betrays the cartel gains a significant profit. That is why cartels are always crying to governemnt to bail them out or to protect them from ruinous competition.

    BTW, how does the government protect them from this ruinous competition? Well, they can pass laws that favor the established players, or they can prosecute the upstart using antitrust law.

    The vast majority of anti-trust prosecutions are due to a politically connected poor performer suing his more consumer friendly competitor.

    The “wisdom” you keep trying to drop on us Hit N Runners is really the ravings of a simpleton. Give it up.

  14. tarran,


  15. tarran, Dave’s brain only processes two things: HFCS and anti-trust. Cut him some slack and buy him a Boylan’s Cherry Cola, made with cane sugar.

  16. So, when does the whole economic system go into a black hole with people sleeping in their cars (outside fo Atlanta), looting in the streets and Polar Bears keeling over from foreclosure notices and AGW?

  17. Epi,

    Are the Polar Bears suffering from HFCS too?

  18. I’m still thankful that the US government threw literally millions of our tax dollars into investigating those dangerous privately-issued gold & silver backed currencies for so-many years, despite scant-at-best evidence of any criminality. Otherwise, there could have been an economic catastrophe and no-doubt a bailout!! (Oops!)

  19. Thank goodness the Defense Appropriations got passed and signed before today. Nice that atleast one enumerated power was paid some mind this year.

  20. He’s leading and McCain/Obama/Pelosi are following.

    In the country of the blind . . . ?

    Mostly, though, its because McCain/Obama/Pelosi/Reid want this to be the Bush bailout bill for one and only one reason – they don’t want to take responsibility for unpopular legislation, regardless of its merits.

  21. “The option of doing nothing is simply not an acceptable option,”

    I beg to differ.

  22. If you can afford to buy a politician, you’ve got enough money and don’t need a loan.

  23. Ahhh, bipatisanship. I find that getting robbed and beaten by two is actually more painful than a lone mugger.

    I’m funny that way.

  24. Pay for the bailout with a new capital gains tax of however big it needs to be.

  25. Pay for the bailout with a new capital gains tax of however big it needs to be.

    Because nothing helps capital markets function the way they should like a big fucking tax.

  26. Stimulate the economy sufficiently to overcome any financial meltdown by repealing the capital gains tax.

    Hey, this is fun!

  27. Those who benefit, as a class, need to be footing the bill, as a class. If you are going to socialize the losses, at least do it fairly. Who knows — if it were made clear that the bailout was to be paid for with a capital gains tax, it might turn out that they need less money than they think right now!

  28. Along with my proposed repeal of the capital gains tax, I’d also like to suggest that these trying times require a flat tax for individuals and corporations.

  29. No wonder your site has so many days devoted to monkeys. I dub you “Hear No Evil.” VemSter is “See No Evil.” Smacky is “Speak No Evil” because she doesn’t post as much as she should.

  30. There’s that Pro Liberatte fellow again. Who is he, and why does he type so poorly?

    I wish I were in Congress, because I’d take advantage of this crisis to propose a major rollback of the regulatory state. On top of my tax reduction proposals. The economy would zoom into overdrive, and this Era of Americans Being Full of Stupid could end. For you, Dave, my comprehensive bill would be called the USAMONKEY Act.

  31. Pro LiberLatte-

    He probably drinks his frothy caffeinated candy drinks with his pinky gracefully arched above the cup.

    As for this: Those who benefit, as a class, need to be footing the bill, as a class. I say, we can eliminate a lot of unnecessary intermediate steps, and just let them take the losses on their ill-considered bets directly.

  32. Socialize/losses/fairly

    One of these words does not belong with the other two and should never appear in the same sentence together.

    I knew I left someone out of my filter.

  33. Why filter out all the fun, Guy?

  34. Those who benefit, as a class, need to be footing the bill, as a class.

    Even assuming the bailout bill passes in its current form, the class of those benefiting more or less directly from it is much, much smaller than those who pay cap gains tax.

  35. CN,

    Okay, I will leave him and Lonewacko in.

  36. There’s that Pro Liberatte fellow again.

    I’m just waiting for Pro Liberace to put in an appearance.

  37. I wish my brother George were here.

  38. Under the Pro Libertate/Pro Liberatte Plan, America will again become an economic juggernaut–both in size and in growth–terrorizing the world with our lofty success. And I guarantee widespread flying cars and fusion generators as well as Mars Disney by 2020. I wish I were in Congress.

    R C,

    That would be his brother George.

  39. Whoa, Citizen Nothing, nice preemption. Tell me, do you know about George due to Bugs Bunny? That’s the only reason I know that one.

  40. EVERYTHING I know I learned from Bugs Bunny.

  41. That’s true of me, as well. I have a strictly Warner Bros.-based education.

  42. I am not pro-bailout. But, if its gonna happen (and it is), then it should be funded by a capital gains tax.

    As far as RCD’s point about direct bene’s of the inevitable bailout not being exactly coextensive with the payors of a cap gains tax, my responses (in descending order of importance): (i) don’t let the perfect be the enemy of the good; (ii) the tax can be structured to increase the coextensivity; and (iii) trickle down. hahahahahahahahahahahahahahahaha on that last one. * pauses, wipes brow* hahahahahaha!

  43. Dave W. apparently favors the ACME-brand bailout.

  44. The DVD collection — volume 6 — of classic Warner Bros. cartoons comes out in a couple of weeks.
    That gives me home.

  45. The DVD collection — volume 6 — of classic Warner Bros. cartoons comes out in a couple of weeks.
    That gives me home.

    Will it includ “Bugs Nips the Nips” or is that one still banned?

  46. Still waiting for the “censored” shorts, Guy.
    I’ve never even seen “Snow Black.”
    (And I call myself a Warners fan, yeah, yeah, whatever.)

  47. On the other hand, for cartoon buffs I can highly recommend the classic Popeye series, now out in three DVD volumes.
    I was never a Popeye fan, but the early Max and Dave Fleisher shorts are amazingly inventive, and, dare I say it, eye-popping.
    I was surprised to see how many of their gags were later recycled in the Warner ‘tunes.

  48. Sorry for the thread-jack.
    Now back to the REAL cartoon figures in Congress…

  49. Wait a second.

    I own stocks.

    I pay capital gains tax.

    However, my investments in that sector and those companies was fairly minimal.

    Yet Dave W. wants me to pay for the bailout with a tax increase?

    That’s the second stupidest thing I’ve read all morning.

  50. Yet Dave W. wants me to pay for the bailout with a tax increase?

    1. I said I would prefer no bailout. Moving back to reality . . .

    2. Actually, if they put me in charge, I would sell you into slavery to pay for it. The cap gains tax is only a second best solution because slavery got such a bad rap in the 1800s and they made these pesky Amendments.

    3. If your stock ownership is small, then your share of paying for the bailout is small, under a pay with cap gains tax plan.

  51. Dave W. wants to pay for capital losses by taxing capital gains.

    Yes, Dave W. might be the stupidest person to ever live.

  52. Dave W. is Ignoramus Maximus
    Tarran was spot-on the money.

    This “rescue” bill stinks so much, it should be ruled a violation of the clean air act.

  53. Dave W. wants to pay for past capital losses by taxing future capital gains.

    And ppl think I am stupid. *sheesh*

  54. This political cartoon says it all:
    If Congress Knew How to Run A Business

  55. The bailout in socializing private risk is only the first step. We’ve now created systemic risk through all of the new financial institutions and mechanisms (e.g., hedge funds) that has to be regulated. We’ll need to social private gains after Obama is elected, probably by requiring significant capitalization through margins. This will limit the speculative bubbles that have arisen over the last 20 years as we’ve deregulated the financial markets. Sorry, the party is over (finally…)

Please to post comments

Comments are closed.