We received this via e-mail from reader Jonathan Bernstein. It makes a point that occurred to us in passing, and we’ve been hugely remiss in not pointing it out, namely, the near-meltdown of the financial system was averted. The urgency about passing a bailout bill is completely phony.
Jonathan makes the case well:
One of the worst things about TARP is the way that Paulson has wrongfully and mendaciously conflated the last week’s money market panic with the need for TARP. They are two separate issues. As you probably know, the short term credit markets got close to seizing up last week. I understand why Paulson injected $105 billion to calm institutional money fund holders and then guaranteed money fund holdings (though the way he did the latter was hamfisted in my opinion).
However, if I understand the NYT article about Paulson’s briefings to Congress to sell TARP, and his other attempts to sell TARP on television, he seems to be saying that TARP will prevent a market Armegeddon. As far as I can see, we got close to Armageddon with the money market panic (which he touched off by letting LEH fail without making sure creditors got a reasonable shot at getting most of their money back). At any rate, money markets won’t seize up while money funds remained guaranteed by the Treasury, so we have time to work out a comprehensive solution and no need to jam through TARP or anything as reckless. We have time to get it right. He is using the money market problems to grab for power, and that seems to me to be both dishonest and under-reported.
As for guaranteeing money funds: I have to remember that they were originally established to get around regulatory strictures of commercial banks. Remember the term, “non-bank bank?” The irony is rich. The FDIC guarantees small and medium sized deposits, presumably for individuals, up to $100,000; now money funds have unlimited insurance for institutions. At the very least Pauslon needs to start imposing regulatory strictures on what money funds can invest in, and how their managements will be replaced if they draw on Government help, but I haven’t heard a peep about such things, have you? We need a longterm solution here. Does Paulson believe that things will be fixed in six months when the “temporary” guarantee for money funds expires? I don’t think so. It is momentous that Paulson has guaranteed over a trillion dollars in money funds and turned our deposit insurance system upside down. He has deftly managed to hide that one under a TARP.
Finally, it is hard to escape the political implications of all this. Basically the President is trying almost to nullify the coming election by getting far reaching legislation in place that should have been left to the next Administration. He creates crises and then calls for comprehensive and badly drafted legislation under panic conditions, and the Democrats in Congress give the President what he wants. With both parties on board now these things will be difficult to reverse. The FISA bill was an important example of this, and TARP would be another. With important pieces of very bad policy almost fixed in stone, what will voters have left to decide in November? Other than the very crucial question of Supreme Court nominees, I am drawing a bit of a blank.