The Three Major Memes of the Great Bailout Bonanza

What to expect now that free markets have been thoroughly vilified.


Now that we've had a day or two of Wall Street rallies, all is forgotten and forgiven by the professional amnesiacs of the nation's financial pages. Happy days are here again, thanks to the massive and smoothly successful bailouts of banks not just in the U.S. but around the world.

Give the Bush administration and its Democratic counterparts in Congress some real political credit: They've played the bailout of Wall Street in spectacularly smart fashion. If the markets had continued to tank after they announced their massive and still growing intervention and likely stimulus package, that would have been proof positive that they should have done more. But if the markets responded positively, well, that's just proof positive that they knew exactly what they were doing. More important, they've conjured the soft bigotry of low economic expectations through sometime next year, or even over the next several years.

That's a great gift to the next president of the United States and to Congressional leaders of both parties as the $700-billion-plus bill starts to come due in 2009 and beyond. And when the unintended consequences of yet again saving businesses from their own bad decisions start to appear. Moral hazard just hasn't gotten much play this news cycle. Look for its stock to rise in a few years, when journalists and analysts get around to questioning the new conventional wisdom that having the government own a chunk of the companies it regulates is such a great idea.

What are the great memes and motifs to come out of the bailout brouhaha? There are too many to list, but here are three top ones that you can look forward to seeing again and again. They share an antipathy toward anything remotely considered the free market and a belief that government intervention is a wise and prudent course. At least this time, because everything is different in the here and now. And because the government has promised to vamoose from the economy once its job is over (just like in Iraq).

1. All past, present, and future economic "crises," real or imagined, are the result of deregulation and uncontrolled "market forces."

"For 30 years," begins a New York Times story titled "Both Sides of the Aisle See More Regulation," "the nation's political system has been tilted in favor of business deregulation and against new rules. But that is about to change, now that the government has been forced to intervene in the once high-flying financial industry to avert an economywide crash."

Never mind that the financial industry is one of the very most regulated sectors of the economy here and abroad. Never mind that the two mega-corporations at the very center of the recent market meltdown, Fannie Mae and Freddie Mac, were massively regulated government-sponsored enterprises that were doing the bidding of the politicians to whom they gave cash so lavishly. Indeed, never mind that the Times story above features a chart showing that George W. Bush increased regulatory spending far more than any president since Richard Nixon (by some measures, Bush even routs Nixon). Forget about deregulatory successes in airlines, interstate trucking, and telecom. The culprit is now and will always be deregulation. And the answer will always be more regulation.

2. Corporate welfare is a good and decent thing, just like the New Deal was. Pity the poor bond trader and Treasury Secretary Henry Paulson's former (and likely future) colleagues at Goldman Sachs. Bailing out investment banks and other off-balance giants of the once great American economy (the Big 2.5 automakers; the airlines after the 9/11 attacks) makes sense, especially in a global economy where everything is connected and competition is so much tougher, and a butterfly flapping its wings in Antarctica can cause a bank run in Pyongyang. "America Needs a New New Deal," argues The Nation, in a view that is no longer just the province of the hard left.

Now that Wall Street has been bailed out in what is routinely and unconvincingly dubbed "the worst economic crisis since the 1930s,"  look for Main Street to start rattling its own tin cup, too. Government at all levels already shovels tons of direct subsidies, individualized tax breaks, and more to everything from farmers to professional sports franchises. Only a sucker wouldn't start playing the me-too game. And no politician worth his or her salt is going to turn away from constituents in distress, especially if they can claim their dry cleaning chain of quick-lube joint is vital to the local economy of Anytown U.S.A. There's strong logic here: If Wall Street sharks deserve grease, why not every business in peril? Or every family with a mortgage in peril (John McCain has already announced a plan that decrees all mortgages above 5 percent are rip-offs; during the vice-presidential debate, Joe Biden claimed the right to renegotiate the principal of mortgages)?

Forget that the New Deal prolonged the Great Depression by seven or so years according to new research by UCLA economists. Forget about the insights of F.A. Hayek and Ludwig von Mises and others who warned of limitless hubris in the limited minds of planners and tweakers. Hank Paulson set the new tone when he told The Los Angeles Times editorial board that the proper job of the Treasury secretary is to make sure that prices, especially house prices, never go down again. Anything else is "market failure."

3. History is bunk, especially when it comes to economic indicators and downturns. One of the most stunning elements of the bailout moment is its virtually complete lack of historical context. The easiest reach has been, as a recent Time magazine cover featuring an image of a '30s-era soup line shows, is to call the global credit crunch "The New Hard Times" and simultaneously invoke the Great Depression and halfheartedly distance yourself from that very claim ("No, this isn't Depression 2.0" reads Time's cover line.). Any comparison with the Depression, which featured an unemployment rate of 25 percent and a contraction in GDP of over 33 percent at its worst moments, strains credulity.

But where are the discussions of previous Wall Street manias and panics, of booms and busts (even the relatively recent tech-bubble bust is largely missing from news accounts that tag the current moment as a black period)? Or recessions (as defined by the National Bureau of Economic Research, which charts this sort of thing)? Americans have never been big on history, but discussions of the stock market and finance are particularly unburdened by even a quick Google search for precedents. Instead, readers are treated to stories touting the Dow's "biggest one-day loss in history" that only get around to expressing losses and gains in more accurate percentage terms in the final paragraphs.

None of these memes bodes well for "Free Minds and Free Markets" over the short term. But they can be countered by a small measure of interest in the past. And the near future, when this latest panic has receded into barely remembered history like the sock puppet from

Nick Gillespie is the editor in chief of and reason Online.

NEXT: Even the Losers Get Unlucky Sometimes

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. Vilified? Fuck, the Market really is the Deity for you fundies, isn’t it?

  2. Well the problem this time was the derivatives market and that really was completely unregulated.

  3. I blame libertarians. We gave too much intellectual cover for conservatives. We were so taken with the idea of lower taxes that we bought into “tweaks” like a capital gains benefit, lower taxes for businesses and lower taxes for mortgage tax deduction. We allowed “conservatives” to argue that those taxes were letting the free market function. Wrong! Yes, the lower taxes the better. But conservatives were picking and choosing winners in the market and dictating what forms of income were more valuable. Both sides told people where to put money (real estate, of course).

    From now on we should fight for small government, without believing that one political party or another has that figured out.

  4. To me, this is analogous to welfare – if the government offers welfare, and you are eligible for it, you would be stupid not to take it. Similarly, if the government will buy any loans (via Freddie and Indie), even the really bad ones, then you would be stupid not to make those loans and sell them to the govt-er, Freddie and Indie, you might even be at a competitive disadvantage with respect to the other lenders if you fail to do so. Additionally, the government will criticize you for not making those loans to begin with. Hence, it is a government created problem. Created based on the premise that home ownership is somehow a virtue. Where is Ross Perot with his graphs and charts when we need him?!?!

  5. Doc, you are so dead on it’s scary. The worst part of this crisis is that it is 100% caused by the insidious betrayal of truely free markets – yet it will be blamed on the failure of the ideas of free markets. Worse, trying to argue that “it wasn’t implemented correctly” will only remind everyone of the hackneyed communist apologists who say “if only we gave it another chance in the right country”

    I’m afraid there is a very serious chance of capitalism being sent off into a long winter for the rest of my productive life.

  6. Apparently the definition of “de-regulation” includes rent-seekers who manipulate the regulators to obtain an advantage over their competitors.

    Who would have guessed?

  7. Nick are you living in some alternate universe where the market rallied more than one day?
    I think you misjudge both the severity of this “crisis” and how much worse the government intervention is going to make it

  8. ++ Badger– brilliant comment.

    Once you’re going to have intervention, you may as well have intervention which at least tries to do some good.

    I’d rather have no intervention than any. But given that there is going to be intervention–which *is* a given–the question is who I trust to do it as well as can be done. Right now, I trust the Democrats. The Republicans intervene in the market to pick winners who’ve already won.

    Credit default swaps and subprime mortgages can’t just be blithely blamed on the government any more than speculative bubbles are solely the fault of bad monetary policy. There are stupid greedy fucks out there, and there always will be. We need to think of some way to make it so that banks fail all the time, instead of the whole banking system failing at once every so often. Creative destruction doesn’t work so well when it’s the entire economy being periodically destroyed.

  9. I think we are going to have more Icelands.I just hope we aren’t one of them.

  10. Bill – “Well the problem this time was the derivatives market and that really was completely unregulated.” implying that lack of regulation caused the problems.

    The problem was derivatives, and derivatives are written to ISDA standards, therefore the problem is ISDA

    The problem was derivatives, and derivatives contracts are reviewed by lawyers, therefore the problem is lawyers

    The problem was derivatives, and derivatives are written on legal paper which is made out of wood pulp, therefore the problem is trees

  11. One insidiously hidden reason that most MSM outlets won’t make the connection to the near-identical bust that happened earlier this very decade:
    When banks tumble, everyone loses. When dot-coms go bankrupt, it’s just those youngsters getting their comeuppance.

  12. Maybe we’ve just been goosed by the Invisible Hand.

  13. @ Lefti – If so, it was wearing the rubber glove of government (which is not lubed).

  14. Nick,

    This would be more impressive if anyone in Wall Street, Detroit, or elsewhere ever said “don’t give us a bailout. This is all our fault.” Bear Stearns could have gone bankrupt, after all. Instead, they whined that the Feds wouldn’t give them enough money.

    Alan Greenspan blames it all on “greed.” Isn’t “greed,” aka self-interest, supposed to be the source of all good in the market?

    What killed all the companies in the past several months was massive leveraging, now “deleveraging.” Why couldn’t that be prohibited?

    As for Harold L. Cole and Lee E. Ohanian, your UCLA economists, they blast FDR for two things–boosting wages and a failure to aggressively pursue enforcement of the anti-trust laws. This is absolutely the first time I ever heard of conservative economists arguing in favor of anti-trust. As for wages, wages were “high” during the Depression, but hours were very, very low, so that earnings were “very low.”

    Still, the effects of the “crash” are likely to be mostly terrible–more and more subsidies and tariffs (aka “fair trade”) instead of fewer and fewer. The day of reckoning will only occur when SS and Medicare slam right into subsidies and bailouts. It will be an education for the Democrats. I hope they pass the test, but it’s hard to believe that they will. Thank god for my Swiss bank accounts!

  15. I would like to see some real economic numbers. I mean real numbers like spending, inflation, investment, growth and unemployment. All I have seen so far is a drop in the stock market and a bunch of speculators on Wall Street going broke. Everyone assumes that that means the meaningful numbers are going to be terrible, but I am not so sure. I don’t see anything around me that indicates that. Building is still going on. Homes, at least the ones not in the far exurbs are still selling. The bank will still give me a loan.

    It would be nice if we could you know wait until something bad actually happened before we paniced and torn down our economy. Could it be that Goldman Sachs and Wall street is not as important as it once was? Maybe we are fighting the last war and that in a new world and global economy the price of homes and stocks just don’t affect things like they used to. Just a thought.

  16. Empire manufacturing and retail sales swirling the drain this morning. Unemployment shifting gears to the upside. Home sales near disaster levels.

  17. I’ve yet to see anyone explain how greed and deregulation leads to people making loans to people who cannot repay them. Please do explain. Because if there’s some secret way of making money in a free market by lending it to poor people, I’d really like to know how it’s done.

  18. Domoarrigato,

    That sounds like a recession. Those things happen. That is far from 1933.

  19. Actually, the sock puppet is currently employed as the spokespuppet for 1-800-BAR-NONE.

    “Because everyone deserves a second chance.”

  20. good thing Reason threw their weight behind the campaign that really was on top of this.

    oh wait, 20 year old newsletters. gotcha.

  21. Rob: It’s called fraud.

  22. The market was goosing us, but the government has decided to postpone the correction.
    Next time, it will be a much larger goosing.

    The government’s magic toolbox can only do so much.

  23. Rob Midro,

    The “secret” was the implicit belief (which we now know to be true) that the government was effectively backing the bad loans, thus the private profit and publicy backed risk, aka “heads I win, tails you lose”.

    Pace Adrian, I’m not sure if it’s actual “fraud” except in the broadest sense.

  24. I understand the government backing the loans. What I don’t buy are people claiming it had nothing to do with government.

  25. Well the problem this time was the derivatives market and that really was completely unregulated.

    It was not “the problem”. It was one of several contributive factors.

  26. Explaining it as fraud needs clarification, as it implies that there was money being made. You don’t commit fraud with the goal of losing money.

  27. Isn’t “greed,” aka self-interest, supposed to be the source of all good in the market?

    I suppose so. Along with decentralization and voluntary networking, entrepreneurship, creative destruction, peaceful competition, commercial culture that promotes tolerance and cooperation across religious/ethnic/nationalist boundaries.

  28. Greed and self-interest are not the same thing.

  29. For example, it is not in your self interest to eat until you throw up.

  30. AIG blew up because it was writing enormous amounts of insurance with risks that management either didn’t understand or pretended not to understand.

    The guys in the office who wrote that insurance got enormous bonuses that they don’t have to give back. The management of AIG made a lot of money during the years that this insurance was enormously profitable. When the fat tail of risk showed up and AIG became insolvent, the government stepped in with taxpayer funds.

    That’s the real reason that regulation is going to come back: not stupid memes or fear of markets, but the recognition that there are a lot of entities out there that are “too big to fail” or “too interconnected to fail.”

    If libertarian economists want to preserve laissez-faire banking, they need to develop a new model which doesn’t require government bailouts or incur moral hazard. As long as banks are implicitly playing with a government guarantee, the government is going to want a hand in what they do.

  31. Rob,

    Two things.

    One is that making loans that can’t be repaid isn’t so bad (ie, worth the risk) if the house you reposess is worth something. But that turned out not to be the case. Could it be the case that what was “rational” (though it’s more accurate to describe it as “a good idea”) for one player individually wasn’t so much when many players did it at the same time?

    Two, regarding fraud and people making money, is that there was a downstream effect of the overvalued securities. From what I understand, people were indeed making money until the fraud was uncovered and the folks left holding the bag were stuck with little to nothing. The discovery of the worthlessness of these securities created a house of cards effect across the board from one company to another that depended on these securities having value to back up loans and credit. Actually, that’s rather vague but it’s about the best I can make of it!

  32. Rob,

    Good analogy on greed. That word gets so overused and just about whenever it is there’s probably some better way to describe it. Self-interest which comports to a respect to others’ rights is not something I would expect to have any undesirable consequences for others, and bad judgment in the exercise thereof I would expect to only have undesirable consequesnces for the practitioner of that bad judgment.

    That said, I’m open to the possibility that the current snafu presents an exception to that, even if I’m far from convinced yet.

  33. John,

    That sounds like a recession. Those things happen. That is far from 1933.

    Did the Depression happen overnight? Or even without a few weeks of the Crash? I don’t think so. Which of course does not prove that another Depression is on its way, but it would support the response that the absence of Depression conditions this soon after last week’s crash hardly demonstrates anything.

    And actually, supporters of the “crisis” view would probably not say it’s 1933 but 1929 and that they were trying to avoid 1933. Whether their means are useful or not to that end is obviously (to you and me) debatable. But again, it hardly tells us anything that we haven’t reached 1933 like conditions. One could easily respond that by then it would be too late!

  34. DannyK mines the fallacy for all it’s worth… Free market folks (and not just fundies there ‘lefti’) don’t argue FOR govt backing. It is people who don’t grasp that free markets already have a solution for businesses with bad plans (or just bad execution). It is people who believe that life is a game that everyone wins just by participating; that bad decisions shouldn’t really have bad consequences because then some people end up, you know, hurt. I’ll be hurting for years now – one because my investments are getting hit now, and two because I’ll be paying the bill for someone else’s fuck-ups. It’s bad enough that the former happens, but the latter just pisses me off no end.

  35. We need to think of some way to make it so that banks fail all the time, instead of the whole banking system failing at once every so often.

    Simple. Repeal government regulations and programs that keep poorly-run banks from failing.

    You don’t commit fraud with the goal of losing money.

    Obviously you’re unfamiliar with the policies of the U.S. Congress.

  36. Let me correct it then. You don’t commit fraud with the goal of losing your own money. There are definitely greedy wall street bankers to blame, as well as government policies that helped them. Blaming just Democrats or just Republicans is only what politicians would have you believe. Sometimes a recession is necessary and not necessarily a terrible thing. What worries me is that all these efforts to avoid one will only make it worse when it does happen.

  37. What worries me is that all these efforts to avoid one will only make it worse when it does happen.

    Something like when the Japanese real estate bubble burst and the govt insisted it could manage a soft-landing? That was what, 10, 15 years of stagnant economy?

  38. @Mike Laursen

    If you don’t know that derivatives, particularly credit default swaps, are at the heart of this problem then you don’t know what the hell your talking about and should STFU. There’s only one possible way out of this mess. All derivatives trades should be declared null and void, and wiped off the books of the speculators. Any financial instrument containing a derivative should also be declared null and void, and wiped off the books. This unregulated, insanely leveraged market should be shut down, and all claims arising from derivatives bets nullified, as if the bets had never occurred. The CDS market is worth over 500 trillion dollars. The entire worlds GDP is only 50 trillion. When all that paper starts going bad there won’t be even close to enough money in the entire world to cover it.

  39. I’m not an economist, but it seems like the root of this whole financial mess is not that hard to understand. Somebody tell me if this makes sense.

    In another thread Nick linked to a WSJ article that said, something like a third of the US asset base is in real estate. So all these houses, and the mortgages against them, are a huge fraction of the collateral base that banks use to lend money against.

    But houses are still over priced, and nobody really knows right now where the market should be. So the banks don’t trust each other (hence aren’t loaning to each other) because who knows if the other guy’s books are clean, or if his assets are just foggy speculation.

    But the banks can’t clear their books out, until after the housing market has settled out and prices have come into line with where they should be (where ever that is).

    In which case, the sub prime market is just a flea bite compared to the real problem, which is that nobody really knows right now what the asset base is to make loans against (i.e. all the houses and mortgages against them).

    In which case the bailout is, at best, a band aid, and it probably won’t do any good anyway. So the banks *should* be shunning it, because it’s not going to solve their problems. The government can’t simply buy up the “questionable assets”, because we’re talking about the whole freaking US residential real estate market.

    Yes? No? Is this at least close to the root of the problem? Or else at least a major contributor?

    When you get “leveraging” mixed into all of this, I start getting a bit lost. You just know that it amplifies the basic problem.

    In which case, there really is no easy way out of this mess. If we just let the housing market do its thing, people are going to hurt. If instead the government inflates currency, to the point that people are able to sell their houses for the dollar amount they think they should get (hence “clearing the market with inflation”), that’s also going to hurt.

    We can look at all the ways government screwed up the financial system that led to the housing problem, but it won’t change the fact that we must now take our lumps.

  40. Can someone explain to me how we can avoid a sub-prime fiasco in the future without more regulation? Why didn’t we have a sub-prime mortgage crisis before this century? Does it all boil down the federal fund rate manipulation? Fiat money? Every study I’ve read shows that CRA is a red herring so blaming that IMO is simplistic.

    I see the value of deregulating a lot of things but I’m trying to understand how we got into this mess if lack of regulation wasn’t a driving factor.

    Basically what the fuck to I tell liberals when they insist deregulation was the cause of all this and regulation is a solution.

  41. “Power”, according to Herb Cohen is the ability to get things done through people.

    Really, take a good math course or at least read Innumeracy by John Allen Paulos.

    Of course, the situation is so convoluted it is difficult to reason through the present situation; but, that is no excuse for being a blind provocateur of that which you are most vulnerable to, vis a vis, the present discombobulation of the facts which veil the value in fiat currency, namely the rule-making government, perturbed and perverted outside of the original intent of its framers–those gambling fools. altruistic and living in pardoxical intent of their own high ideals.

    Is it a “living” constitution or is it dead? Russia has something to teach us, and do not turn a knee-jerk ear to the present without considering the reality of your choice(s).

    Do you truly believe in being responsible?

    We are a victim of our own success: Grab more or collapse of our own fertile weight, Prosper or lose the sanctity of your soul, Live well or breach the divide doing simply what is right–or correct?

    More. That is a compulsion of a past success. Prune your needs so that your progeny may prosper on their own power.

    Don’t drink the kool-aid. Eat your own dog-food; and, for God’s true, virtuous, and glorious sake, do not ignore that which your intuition tells you…


  42. “Never mind that the two mega-corporations at the very center of the recent market meltdown, Fannie Mae and Freddie Mac, were massively regulated government-sponsored enterprises that were doing the bidding of the politicians to whom they gave cash so lavishly.”
    So are you saying that Fannie and Freddie were lobbying the politicians to “massively regulate” them more? I don’t think so. Kind of blows a hole in anti-meme #1.

    Meme #2 could be applied to the Iraq war and the “War on Terror” just as easily as to the bailout. I love “[…] the government has promised to vamoose from the economy once its job is over (just like in Iraq).”! In my mind, the Bush Administration has been all about corporate welfare, so the bailout is like a going-away party in that regard.

  43. Rob Midro – loans to people who couldn’t make them is the start of the problem, but it isn’t really the cause. Buying up every bad morgage (not being repaid and underwater) would cost less than half the bailout and much less than the trillions lost.

    The first “cause” is bundling up all of the loans and selling them as securities (which, of course, people want to buy because of the capital gains benefit).

    Those bundles could contain 20 good loans and 1 bad loan, but that one bad loan makes the entire bundle hard to value. (The problem is squared when bundles are bundled – then one bad loan can make hundreds of loans hard to value).

    People figured that out and sought insurance (credit default swaps). But those are impossible to value if you can’t value the bundles (CDO’s) Bye bye AIG.

    The more of these bundles firms sold, the more $ they could make for awhile. They made even more $ when they sold the bundles and backed them themselves – kept them on the books of a related entity as loans. Of course, when the loans came due and they couldn’t value the bundles the end was near. It was especially near when some companies were leveraged 30:1.

  44. Tommyrot. Lack of regulation was at the heart of this debacle. Fannie Mae and Freddie Mac were *supposed to be* closely regulated, but they were not. The Federal government knowingly and deliberately went slack on regulation because their friends in business were getting so rich. Remember, McCain’s campaign manager used to be a lobbyist and was paid MILLIONS by Freddie Mac and Fannie Mae for him to lobby in favor of relaxing government oversight on them.

  45. Honestly folks I do not think overall the totality will, or has sunk in yet. All truth will be discerened as three stages. First it will ridiculed, second it will opposed and last as self evident. When consumers see no residual benefit maybe the next predicated will; begin. Global wise movement of raws is down 50 percent over two months and that is plain vanilla face. Another metric under intense scrutiny is and will be net capital as a percent of total assets. Also please do not revile facts since this is the 3 step lack of dicernment we have today on cultural impedement to capitalzation projects of over abundant non self-liqiidating debt’s. Just these factor’s affect you to the extent that will linger longer that you will ever imagine.
    Please start here folts for a snap shot TO REALITY not body politic’s which will never bring true edification. Some years ago a observer stated Father Malachi Martin, April 18, 1996 Interview. ” The global principles nowadays are in ways rather baffling because there’s no doubt about it that the tendency of the globalist groups now existing, who are very powerful, is to limit the population of the earth. It is to make certain continents both dumping grounds and extraction grounds, that is, grounds where waste can be dumped and where the goods of the earth can be extracted. You can foresee the time when the Congress and the Senate in the United States will similarly be engaged in local matters but nothing major, nothing continental, and certainly nothing global. No foreign policy, no wars, nothing like that.”
    “Our system of free enterprise rests on the conviction that the federal government should interfere in the marketplace only when necessary,” Bush said. “Given the precarious state of today’s financial markets – and their vital importance to the daily lives of the American people – government intervention is not only warranted, it is essential.”
    America’s public finances had never been in worse shape, largely because the government had overseen massive “borrowing from the Chinese to buy oil from the Saudis.” Sen. Clinton
    I must stop there because if you see this post please discern reality first then think what must really be done and what has been already done. What do we really know folks.
    I know many of you work Corporate but what do really know to be true and relavent.
    You are not prepared!

Please to post comments

Comments are closed.