Well-Warranted Skepticism is Welcome

The Drudge Report is reporting today, through Yahoo, that there is significant opposition from BOTH parties to the government’s plan to bail out financial institutions….

The criticism prompted House leaders to push back their timetable for approving emergency housing legislation, saying final action would take at least until early next week. The move came after a growing number of Republicans voiced skepticism and, in some cases, angry opposition, to the administration’s proposal to help the two companies, Fannie Mae and Freddie Mac.

Of course, as the article goes on to state, it isn’t clear whether or not this is just a gesture of anger before the Congress ultimately adopts the plan, or if this is for real. Regrettably, much of this anger is fueled not by objective reasoning as much as by fear of sparking voter anger in an election year with huge taxpayer bailouts…

The Republican opposition threatened to spark an ugly intramural fight with the White House. In a high-stakes election year, the resistance reflected the deep fear among some lawmakers that the rescue plan could trigger a large taxpayer bailout, touching off a wave of voter anger in November. For some lawmakers facing tough re-election contests, opposing the rescue plan is a way to re-affirm their identity as budget hawks while publicly breaking with a deeply unpopular, lame-duck administration.

IS THIS ANGER WARRANTED?

Yes it is.  As the Cato Institute reported in an EXCELLENT piece that I continue to quote from titled “Giving the Fed New Powers Ignores History,” Steven Horowitz not only explains how a vicious cycle of market disruption caused by Fed policies spur greater calls for Fed authority, but also how there is a moral hazard in policies that insure financial institutions from risk:

The Fed, particularly former chair Alan Greenspan, also bears significant responsibility for the current problems facing housing lenders. A few years back, Greenspan said that the Fed could, and would, do nothing to stop “asset bubbles” from happening, but would stand by to cushion the fall if such bubbles occurred. In ways much like the expansion of deposit insurance, the so-called Greenspan Doctrine encouraged banks to engage in excessively risky loans under the belief that if those loans went bad, the Fed would come to their rescue. This is the problem of moral hazard: when you insure someone against a negative outcome, the insured has less reason to take precautions against causing that outcome.

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