They can’t say they weren’t warned. Members of the U.S. House of Representatives were told by the President, the Secretary of the Treasury, the Senate, and the House Democratic and Republican leadership that if they voted against the economic bailout bill passed by the Senate, the stock market would crash. A minority of 171 of them did, and the market has indeed crashed—in spite of the “rescue” bill passing by a large margin.
There is never any good time to have a massive financial crisis, but having it erupt only a month before presidential and congressional elections is most unfortunate. The impending elections put members of Congress in a position of feeling like they had to do something, even if it was a questionable “solution” to the crisis. If the crisis strictly had to do with balance sheets, the “cure” might have made more sense. Unfortunately, the crisis now revolves around a lack of confidence among investors and consumers, and the bailout bill has done nothing to shore that up.
Every additional unprecedented action taken by the feds seems to increase the concerns of consumers and investors.
Americans have learned a tough and painful lesson recently. We have seen our central bankers and “regulators” determine that some companies were “too important to fail” so they stepped in with our tax dollars to prop them up. It hasn’t worked and, if anything, the economic problems have deepened. In spite of flooding markets with over a trillion dollars by increasing “liquidity,” bailing out distressed companies, cutting interest rates and, for all practical purposes, nationalizing one of the largest insurance companies in the world, the meltdown continues. In fact, it has begun to spread around the globe.
Our federal government is making unprecedented interventions into the marketplace. Their justification for doing so (in addition to the concept that some companies are “too important to fail”) is that consumers and businesses no longer have reasonable access to loans and credit. Why are lenders fearful of lending for ordinary transactions? The problem isn’t so much a concern over the ability of borrowers to repay loans. It has more to do with accounting rules that force financial institutions to devalue assets and increase their cash reserves when doing so. The main culprit is the mark-to-market rule that was part of the Sarbanes-Oxley legislation passed in response to the dot.com crash. In essence, this regulation forces companies to devalue assets they have no intention of selling in the foreseeable future by setting their value at current depressed market rates. When they significantly reduce the value of their assets, they have to hold more cash in reserve, which greatly reduces their ability to lend money.
The roots of the current crisis came to light months ago, centered in the real estate market.
If government regulators had first pursued some reasonable and at least temporary relaxation of the mark-to-market rule, financial institutions would have more cash available to lend and the current credit crunch would not be as severe.
Unfortunately, Congress did nothing to rein in the abuses that have been obvious for years at quasi-public mortgage giants, Fannie Mae and Freddie Mac, and our federal regulators didn’t take reasonable steps to allow financial institutions to preserve liquidity on their own. Instead, they waited until the situation hit critical mass and dumped trillions of dollars of taxpayer “liquidity” into the system. Don’t worry, they tell us, we will get all or most of it back. After all, they are from the government and they are here to help us.
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