Tuesday, September 16, 2008

Suddenly, the mattress looks like a pretty good place to keep my money

Here's the recent tally:

1) When Bear Sterns is in trouble, the federal govt subsidizes its acquisition by JP Morgan Chase.

2) When Fannie Mae and Freddie Mac are in trouble, the federal govt takes them over outright.

3) When Lehman Bros. is in trouble, the executive branch of the federal govt does nothing, leaving the bankruptcy court to sort things out.

4) When Merrill Lynch is in trouble, the federal government watches closely, and then breathes a sigh of relief as Bank of America buys it. (Bank of America shareholders are likely making a different kind of sound.)

5) When AIG is in trouble, the federal government jawbones other banks to lend it some dough (after NY State permits AIG to dip into its subsidiaries' reserves).

Is there a rationalizing principle for this bewildering combination of actions and inactions? Each move can be explained as individually sensible: Taking over Fannie and Freddie made sense given that they were already quasi-governmental; taking no action on Merrill was appropriate given the willingness of the private sector to come forward; etc. But one senses that Ben Bernanke and Hank Paulson don't have an overall set of principles guiding their decisions.

And yet, operating almost by feel, Bernanke and Paulson are probably the two most capable high-ranking Bush appointees (which is not necessarily to say they'll be able to prevent a worsening of the current financial situation). By contrast, SEC Chairman Chris Cox (remember him?) does appear to have a guiding philosophy, or rather ideology: namely, the markets are just about always just fine, so government doing anything will almost always make things worse.

The emerging post-Ike narrative has it that the Administration learned from Katrina that cronyism is no substitute for professional management, and there's a lot to that. But the contrast between the creative improvisation by Bernanke and Paulson, on the one hand, and free-market ideology by Cox, on the other, should serve as a reminder that heck-of-a-job cronyism was only part of the story of the errors of the Bush Administration. It explains, for example, how the Administration bungled the Iraq occupation. The other, and probably larger, piece of the story of the Bush Administration (at least prior to the 2006 midterm election) was ideologically driven bungling. If the Cheney/Wolfowitz branch of the Bush White House had not decided to go into Iraq in the first place, Paul Bremer never would have had the chance to disband the Iraqi army.

And no, of course I'm not saying that Chris Cox is responsible for the financial crisis, except to the extent that he, as a Congressman, was quite enthusiastic about deregulating financial services. Plenty of Democrats were also enthusiastic, so this is a bipartisan mess. Still, if we go back and look for the single person most responsible for financial services deregulation, it would be hard to find a better candidate than John McCain's good buddy, economic guru, and former campaign co-chairman, Phil Gramm. That would be bad news for McCain's campaign, but only in a reality-based election.

Posted by Mike Dorf