Turn On, Tune In, Bail Out

I started this blog principally because I figured it would allow me to pontificate on a wide range of subjects, unfettered by any sort of self-avowed focus or specialty. But now I'm worried that it's rapidly devolving into a simple vehicle for defaming Thomas Friedman of The New York Times opinion page. I swear, when I started out, I had a broader, more diverse mission in mind. But the man leaves me little choice.

Writing in today's Times, Friedman does an absolutely brilliant job of distilling all the myth, posturing and outright stupidity swirling around the ongoing financial crisis into one compact, easy-to-read trope on the need for a massive government bailout of Wall Street. By all means, read his argument in its entirety. But here's all you really need to hear:

"I’ve been frightened for my country only a few times in my life: In 1962, when, even as a boy of 9, I followed the tension of the Cuban missile crisis; in 1963, with the assassination of J.F.K.; on Sept. 11, 2001; and on Monday, when the House Republicans brought down the bipartisan rescue package.

"But this moment is the scariest of all for me because the previous three were all driven by real or potential attacks on the U.S. system by outsiders. This time, we are doing it to ourselves. This time, it’s our own failure to regulate our own financial system and to legislate the proper remedy that is doing us in."

In recent weeks, I've heard much foolishness and scare-mongering spouted about the current credit freeze-up and the concomitant panic on Wall Street, but for sheer idiocy, Mr. Friedman takes the cake. In what appears to be utter seriousness, he announces that the Cuban missile crisis, the JFK assassination and September 11 all pale in comparison to the recent convulsions in the financial sector. Just as a quick history refresher, he is talking about, respectively, the closest we ever came to full-scale war with a nuclear super-power, the public murder of the leader of the free world, and an unprecedented terrorist attack that killed 3,000 people and changed our way of life.

In case you were seeking anecdotal evidence of this country's staggering intellectual decline, look no further. That a man who could say something so patently stupid is paid to write a weekly column for the most prestigious newspaper in the country speaks volumes. But I wasn't looking for proof of what I already know, that Thomas Friedman is a boob. I read his column regularly, out of a certain morbid fascination, so he can no longer surprise me. I highlight his piece only because it provides such an excellent example of everything wrong with the popular analysis of the "crisis" on Wall Street, and with the solution to that crisis being championed by a political elite that claims to know what's best for the economy.

For the sake of context, here's the condensed version of how we supposedly came to the brink of this financial Waterloo, and the remedy we're told we must enact: Over the past several years, various banks and other financial institutions invested huge amounts of money in new-fangled assets consisting of many home mortgages "bundled" together. They turned out to be a risky investment, but because the government failed to regulate the buying and selling of these assets, an investment bubble was permitted to grow, and when the housing market started going south a couple years ago, the bubble burst. So now we must allow the government to spend $700 billion buying up those risky investments so banks will regain the confidence to start lending again. If we fail to do this, we risk a complete halt to lending, which will send the economy into a deep recession.

But some people aren't convinced of the veracity of this narrative, as evidenced by the House of Representatives' vote against the bailout this past Monday, which evoked shrieks from Thomas Friedman's ilk, accusing the House Republicans that voted against the bill of betraying the country in its time of great need (but not the House Democrats who voted against, curiously). Dissenting Republicans said, in effect, that they simply cannot spend this massive sum of public money on a bailout for a financial industry that did so much to bring on its own destruction, and that government has no authority to influence the economy on this scale. Two days later, I'm still waiting to hear a cogent, rational refutation of this argument.

Instead, all I hear is grand-standing and more fear-mongering from backers of the bailout, who scream ever louder that failing to act will bring about a second Great Depression. For evidence, they point to Monday's collapse in the stock market, which immediately followed the no-vote in the House. How's that for specious reasoning? "We promised markets that we'd fix this mess for them, and then we didn't fix it, and the markets dropped! That's why we have to fix the mess!"

This is the best example yet of what economists call "moral hazard," the notion that if you provide individuals or companies with the incentive to behave badly, they will do so. By announcing that the government can and will fix this huge mess, banks and other firms can shunt all responsibility onto the government. Rather than absorb losses, declare bankruptcy or sell out to solvent institutions, they can simply wait around for the government to cure their financial problems. With a blank check in the offing, none of them will resume normal lending until that check clears, and so the self-fulfilling prophecy of a crisis comes to fruition.

Such counter-productive incentives have motivated every stage of this ongoing situation, from the creation of two government-backed entities, Fannie Mae and Freddie Mac -- designed to encourage loans to many people who shouldn't have qualified for them -- to the absurdly low interest rates the Federal Reserve fostered after the last recession to encourage more lending than was healthy, to previous government bailouts of individual firms, which sent the message that if you incur big losses, the feds will take the hit for you. To make a long story short: If you encourage individuals and companies to borrow and lend more money than they have, you will eventually provoke a lending crisis.

But as Thomas Friedman makes abundantly clear, the past doesn't matter. Don't ask how we got to this situation in the first place; don't ask whether a really big bailout will succeed where smaller ones simply made the situation worse; and don't question the assumption that the present problem is always the worst problem ever. Simply yell your nostrums louder, and keep scaring people with doomsday predictions until you get your way.

As every high school civics student knows, it's illegal to yell "Fire!" in a crowded theater. But there are no such restrictions on doing it from the editorial pages of an august newspaper.