We have been told that we must do something to save our credit markets -- and we must do it now. We have also been told that the only viable solution is the recently passed bailout bill financed by the taxpayer and piloted by the Treasury Department. Perhaps there are other alternatives.
The existing legislation is a bandage at best. Americans are closing in on three trillion dollars in consumer debt. This liability leviathan is composed of our credit card debt and personal loans for items like automobiles and college. It does not include our mortgage debt. Seven hundred billion dollars is barely a band-aid on the credit market crunch; it is not a tourniquet. Let's be frank. This bailout legislation is the first step in an effort to socialize debt -- while it attempts to keep profits private.[i]
Markets work because they reward good investments and punish bad ones. The legislation's effort to protect unsound investments seems to assume that investors will not take these protective measures into account in future financial speculations.
This quasi-socialist economics cannot and will not work. When a government nationalizes its country's debt, it makes rational assessments of risks in the private market all but impossible. Is it risky to invest in "The Fiduciary Bank of Loans to Unqualified Borrowers?" Who knows? Depends whether or not the bank's "troubled assets" have made the Treasury Department's list.
The potential for further (and far more extensive) corruption in the credit markets under the legislation is almost too vast to conceive. The possibility for graft is both short and long term.[ii] In the short term, the Treasury Department has almost unlimited authority to determine the definition of a troubled asset and then to give preferential treatment to the holders of those troubled assets.[iii] In Washington DC, it is usually not the squeaky wheel that gets the grease; it is the well-oiled (best connected with the highest paid lobbyists) wheel that just keeps on a spinnin'. In the long term, should the bill somehow be successful and the troubled assets saved, the refund of the money to the taxpayer will be a political payback. No one is keeping track of how much of that 700 billion is actually coming from your pocket. The Congress will hand out the taxpayer reimbursements. Yeah, that's never done without partisan consideration.[iv] Even this so-called "emergency rescue plan" was packed with political kickbacks.
Assuming that this bailout plan was necessary and that it stabilizes our credit (at least for the short term), the time has come for a free market strategy to insure long-term capital growth in America. Here is a list of suggestions:
1. Privatize Fannie and Freddie. Every homeowner who reads this article will remember purchasing that first home. For most of us the process was daunting. A hefty down payment was required. We knew that homeownership was much more of a responsibility than it was a right.
There is no reason whatsoever to keep the corrupt and unnecessary GSEs Fannie Mae and Freddie Mac alive at taxpayer expense. Since their inceptions, both of these GSEs have served as little more than leftist utopian playgrounds.
Sleaze thy name is Government Sponsored Enterprise. The top executives of these two GSEs, politically appointed executives, have stolen hundreds of millions of dollars in so-called "performance bonuses" from Fannie and Freddie. Christopher Dodd, the chairman of the Senate Banking Committee, has received over a hundred thousand dollars in campaign contributions from the very GSEs he is supposed to oversee.
Owning a home is part of the American Dream. It should once again require thrift and saving. Homeownership is certainly not a constitutional prerogative.
2. Repeal the Community Reinvestment Act (CRA). Like Fannie Mae and Freddie Mac, this is another leftist quixotic nightmare. The CRA has put hundreds of thousands of low-income people into houses that they could not afford. It has forced private banks ("blackmailed" is more accurate) to put billions of dollars into risky "subprime" loans. Ignored in the Fannie, Freddie, and CRA debacle are the middle-class property owners and investors who have played by the rules of the private market. These Americans have lost staggering amounts of money in the burst of the housing bubble -- a burst and a bubble caused, to a great extent, by the federal government's meddling in the housing market.[v]
3. Repeal the capital gains tax. If money is needed in the capital markets why tax it? Leave it there.
A lot of countries have dumped this tax in the last twenty years. Repealing the capital gains tax in the U.S. would free up around 100 billion dollars a year for the market. 4. Reduce the corporate tax rate. Corporations pay about 350 billion dollars a year in taxes. If they really need the money -- let them keep the capital that they already have. 5. Fix the mark-to-market ("fair value") rule. The SEC was given the authority to "study" current mark-to-market rules in the bailout bill. (See section 133 of the legislation.)
The government should alter its mark-to-market rules -- and soon. The "book value" of a stock is not the (arbitrary and external) mark-to-market value. Some sort of rolling market average should be used in place of the mark-to-market value. This would allow stocks to be traded at more realistic values.
6. Repeal the Humphrey-Hawkins Full Employment Act. Fed Chair Bernanke has admitted that the dual mandate (long term stability of the dollar and short term "full employment") of Humphrey-Hawkins is unachievable. The major effect Humphrey-Hawkins has been to destabilize the dollar. 7. Repeal Sarbanes/Oxely. The so-called SOX act was put into place to prevent exactly the kinds of abuses that have led us into this crisis. It hasn't worked and has clogged up the financial system with a myriad of obtuse accounting regulations. Start up fees for meeting SOX requirements (for private companies seeking to go public) run about 3 million dollars a year. 8. Drill. Drill. Drill. We send 1.15 billion dollars every day out of this country to purchase foreign oil. If we made this country energy independent we would pump almost that much money into the economy every year. We need to free up all access to domestic fossil fuels and deregulate the building of nuclear power plants. And we need to do it now.
Aggressively pursuing energy independence would add billions to our economy and provide tens of thousands of new, high paying, American jobs. More than anything else we can do, unleashing access to all of our fossil fuel reserves (there are plenty of them) and unharnessing the nuclear power industry would help provide the long term economic and energy stability this country so desperately needs.
9. Privatize Social Security. The Social Security system has to be fixed someday. Why not start now? The federal government collects nearly 20 billion dollars every day in SSI payments. This money is presently funneled into the world's biggest Ponzi pyramid.
A slow but steady shift of these funds into private retirement accounts would provide long-term stability for our capital markets.
I would be so bold as to suggest that some of these funds could be directly infused into the housing market. What more important asset is there for a retired person than owning a mortgage free home?
With the exception of the "study" of the mark-to-market rule, none of these free market proposals are on the table. We are told that we face an economic disaster of titanic proportions and then, in the next breath, we are told that only a massive influx of taxpayer dollars can save us. People with sound economic sense know that this is not true.
It is time we started looking to the market place for solutions to our economic crisis. If we continue to look to the federal government to fix the problem, we will eventually corrupt and destroy America's free market system ... and lose ever more economic freedom.
[i] Taxpayers have been promised that public funding for foreclosure mitigation will eventually be recouped. How the money will be refunded to the taxpayer is still a mystery. [ii] This kind of fraud and corruption occurs far more often in socialized economies than it does in free market economies. "Inside information" is not rare in socialism -- it is the norm. My soon to be published memoir Underground: Life and Survival in the Russian Black Market addresses this issue. [iii] Consider this provision taken directly from the bill:
(6) providing financial assistance to financial institutions, including those serving low- and moderate-income populations and other underserved communities, and that have assets less than $1,000,000,000, that were well or adequately capitalized as of June 30, 2008, and that as a result of the devaluation of the preferred government-sponsored enterprises stock will drop one or more capital levels, in a manner sufficient to restore the financial institutions to at least an adequately capitalized level...
[iv] There are no specific measures in the bill for returning to the taxpayer whatever money the government earns by liquidating troubled assets. [v] Several American Thinker readers contacted me on this issue, urging me to write about it. Middle America was mugged by irresponsible loan practices sanctioned by the federal government before the bailout legislation was passed. They are being robbed again. With the passage of the bailout legislation, the potential for the middle class to be robbed again is very real.