Tuesday, September 30, 2008

Understanding the Financial Crisis

Yesterday the House voted down the $700 billion bailout bill. The stock market tanked (although it's gained back about half of what it lost as of 1.30 pm today). No one really knows what will happen next.

I'm not an economist and I don't really know what to think about all of this. On the one hand, I'm horrified by the idea of handing out taxpayer money to banks and individuals who made bad investment decisions. As a friend in HR is fond of saying, people will keep doing what you reward them for doing. If you bail people out after they made risky investments, they have a pretty good incentive to do it again, and hope for another bailout. I'm also generally against increasing the reach of government and against government intervention in the markets. The bailout package reads to me like creeping socialism.

But. A lot of very smart people, including a lot of conservatives, are pretty worried about this crisis and are absolutely convinced that the government needs to intervene to prevent a worldwide crash. I don't know, maybe they're right. Maybe things will get a little clearer over the next few days, as Congress is on a break over the Jewish holidays and there won't be any legislative action.

For now, I'm just trying to learn a little more about where things stand, how we got here, what happens next. I thought I'd share a few useful links along those lines.

On how we got here: I'm pretty convinced that a large share of the responsibility lies at the feet of Democrats in government and elsewhere who forced banks to make high-risk mortgage loans to low-income, mostly minority populations. Fannie Mae and Freddie Mac were a major part of this system and fueled the risky subprime mortgages by securitizing the debt. Of course, there is blame to go around, and there were points at which Republicans were in the majority and could have pushed harder for better regulation of Fannie and Freddie. For the record, Bush and McCain among others worked hard to reform Fannie and Freddie but didn't manage to get anything through Congress. Links on this topic:
What the bailout actually contained: The Wall Street Journal has a fairly complete explanation, although it seems like a few of the details are a little thin. But I think that's because Treasury Secretary Paulson hadn't quite figured out how everything would work, not because the WSJ omitted details in its reporting. Ilya Somin has some thoughtful analysis and links on whether it was a good idea.

Playing politics: Like Glenn Reynolds said:
You know, it would be easier for me to believe this was a crisis, if the people in charge were acting like it was a crisis, instead of just an opportunity for graft. Then again, to some of these people, everything is just an opportunity for graft.
Other bloggers with good thoughts on the politics of the vote include The Anchoress and Besty Newmark. In particular, Nancy Pelosi and some other House Democrats seem to have gone out of their way to make the vote more, rather than less, partisan.

And don't miss the ACORN angle: ACORN, a liberal community organizing group with a record of voter registration fraud, actually gets government (taxpayer) money to help low-income people get mortgages. Over the past two decades they seem to have be part of the problem of encouraging the system to give mortgages to people who couldn't afford them. The original Democrat-proposed bill would have directed a bunch of the bailout money to ACORN and similar groups. ACORN has significant ties to Obama and other prominent Democrat politicians:

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