†Bill Clinton quoted Winston Churchill the other night saying "Politicians will sometimes do the right thing, but only after exhausting all other alternatives."† That's an apt description of the current banking crisis.†
†Congress refused to reform Fannie Mae and Freddie Mac back in 2003, despite their Enron-like accounting scandal; and repeated this refusal again in 2005.† Today we know they were the big dominoes that started the run on the American financial system.† The Community Reinvestment Act just made things worse - penalizing banks if they didn't lend to "subprime" borrowers.† And the Federal Reserve pumped too much money into the economy for too long, encouraging Wall Street to take excess risk.†
So it's silly to blame and regulate Wall Street, in this situation the tail of the dog.† In fact, it could cause another depression, as Amity Shlaes points out in the Wall Street Journal†here.
So how about Congress do it right this time?† Today's Wall Street Journal's editorial "The Paulson Sale" has some free-market solutions.†† Key points (read them here) include:
1. An open auction - allowing private buyers and the Treasury to bid on securities, so honest taxpayer aren't stuck with the junk.†
2. Use the proven FDIC system to efficiently and effectively inject capital where appropriate.† A new hastily designed system (no judicial oversight?† judges rewriting mortgage contracts?) could be very damaging.
3. Do not implement excessive, unproductive Congressional controls or add pork to the bill.† (Low income housing subsidies?† That caused the current problem.† Some people are better off renting and letting property owners fix the roof)
America's financial system is already fixing itself without government intervention, per yesterday's announcement of Goldman and Morgan Stanley's conversion back to a bank holding company.† Please do your part to ensure that Congress does not re-try the destructive regulation and demagoguing that caused the depression and do it right this time.