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Shadegg on the Bailout

I missed this excellent interview with my local Congressman, John Shadegg, whom I don't always agree with but is still way better than 99% of Congress:

 

David Freddeso: Is a bailout necessary to save the economy at this point from complete collapse — from a major failure of multiple institutions at the same time?

Shadegg: I think that’s the most difficult question that could be posed under these circumstances, and it’s the question that I have struggled all week to find the answer to. I have talked to a lot of smart people who know Wall Street, know banking, know the economy quite well, and you hear different opinions. Some will tell you that it is absolutely essential. Quite frankly, I’m skeptical about that.

But I think that in some ways the question doesn’t matter any more. Because Secretary Paulson chose to raise the matter in the way he did — that is, to go public in a very high-profile way, not just with his concern, but with a kind of Chicken-Little, the-sky-is-falling kind of demand — it became a self-fulfilling prophecy.

That is to say, once the secretary of the Treasury announces to the world that there is a pending financial collapse, perhaps as great as the Great Depression, and Congress must act — he has sent a signal that essentially tells world markets that Congress must act. I will tell you that has been one of the most frustrating things about this since the very beginning...

I can’t tell you how many members of Congress were stunned at that news, and were stunned that none of their local bankers were calling them. And then they called their local bankers, as I called my local bankers, and my local bankers said, “I think things are just fine.” I talked to one banker who said, “Gosh, we’ve got money, and we’re liquid, and we’re making a profit. And we’re in the market selling loans, and we’ve got competitors trying to sell loans against us.”

So, at that point, there’s a disconnect. Secretary Paulson is claiming that this is a catastrophe of generational proportions that could go worldwide. And none of what we were hearing back home matches that. And I’m not speaking just for myself, but also for many of my colleagues who were making similar calls. They weren’t being called by their bankers, or by any of the businesses back home saying, “I can’t borrow any money”.... If, in fact, Paulson had struck a chord with the American banking community, wouldn’t you think that after he announced on Friday that there was a crisis of liquidity that threatens the entire nation’s financial solvency and Americans’ jobs from coast to coast, that my community bankers in Arizona wouldn’t have been picking up the phone by Monday morning, if not over the weekend, to say that “I share the Secretary’s concerns”?

 

Posted on September 29, 2008 at 10:53 AM | Permalink

Comments

The Great Crash of '08 has begun.

It took free market ideals 50 years to make a comeback from the last depression. It may take longer this time.

Posted by: WWS | Sep 29, 2008 1:05:17 PM

I asked the question the other day that given the list of who has gone under and/or been taken over (privately or publicly) is there anyone left on the edge who could be classified as too big to fail?

Posted by: Stephen Macklin | Sep 29, 2008 1:14:25 PM

Thanks for your postings on the topic.

I think the great big question is: what are the consequences of not doing a bailout - either in the current environment or before the crisis was declared.

I have been accepting that they are huge, based on my reading about the way the risk was sliced, diced, repackaged and sold. It is likely that the markets would not be able to sort this stuff out without a prolonged period of chaos - a period which would force government action.

But I don't think anyone really knows. It looks like the "leaders" don't want to find out. I'm currently with them, but I sure don't have great confidence in that position.

In a democracy, unless prohibited by a constitution, political processes are an extension of the market (and operate themselves as a sort of market).

Posted by: John Moore | Sep 29, 2008 1:18:34 PM

This is a rather naive and arrogant way to posit the issue. Shadegg seems upset that Paulson did not confer with him and his associates first, and he is shocked, shocked, that his constituents ("local bankers") had not called him.

Perish the thought that a representative is not attuned to an esoteric issue! Representatives focus on those issues that affect their chances of being re-elected; it is safe to say there is no financial services industry* in Phoenix and so esoteric questions about credit default swaps, liquidity, asset valuation, and mark to market accounting are far, far, far beyond the purview of Shadegg or any of his quotidian concerns.

It is worth remembering at this juncture that two government initiatives have exacerbated the current problems. The first is the government's explicit policy of encouraging home ownership, via the mortgage interest deduction and various subsidies thrown at Fannie Mae and Freddie Mac. The second is Congress' insistence, and FASB's promulgation of, mark-to-market accounting for certain illiquid securities.

So, Shadegg and all his other compadres can bitch and moan all they wish about the presumption with which Paulson has gone about trying to propose a solution, and, admittedly, it is a deeply flawed solution that raises troubling questions about the appropriate response of government to industry failure. But these are the cards that Paulson has been dealt at the hands of a know-nothing Congress whose unwarranted interventions in (1) the housing market and (2) esoteric accounting standards have contributed rather much to the current situation.

*It may be possible that there are financial services firms' call centers or branch offices or other back office operations in Phoenix but these are (1) rather mundane operations far from the maelstrom, and (2) the people employed in such back office functions are as clueless about what is currently going on as the House is. So Shadegg cannot assume that his constituents would either be informed or concerned about issues far beyond their purview.

Posted by: Dave | Sep 29, 2008 4:15:13 PM

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