Vote No on the Bailout
The following is an e-mail I sent to a Republican Congressman who was asking for input on the bailout proposal before today's vote. I have removed the name of the Congressman...
Dear Congressman xxxxx,
My name is Ross Kaminsky. I'm a 21-year veteran trader of derivatives (but never a trader for or employee of a bank or investment bank), a free-market blogger at my own site (rossputin.com) and for the Denver Post, a contributor to Human Events, and somewhat of a Republican activist in Colorado. You and I have some friends in common...
Here are my thoughts on the bailout plan:
I understand the argument that the final cost to the government will likely be far less than the initial cash layout, but the initial and final costs are not the most important arguments against the current plan.
The main reason I strongly object to the plan is that it will give a permanent massive and corrosive presence of the government into our financial system.
Here's why we must therefore oppose the plan:
1. It will encourage direct and indirect corruption. Direct in the obvious way of corruption that allows people to game the system at taxpayer expense. Indirect in the way that the Democrats just demonstrated, trying to turn the program into funding for ACORN, one of America's most evil organizations. Given enough time (and it won't take much if Dems control everything in 2009), they will succeed in making this program even more destructive than they made Fannie Mae and Freddie Mac. This program is like taking a handgun away from a armed robber and giving him a machine gun.
2. The government will have two inherently conflicting goals: Protecting the taxpayer (by paying the lowest possible price for assets) and adding solvency to the banking system (by paying whatever price is necessary to achieve that even if it's not the lowest possible price). The very existence of this conflict is reason enough not to put the government in that position. And the government can't aim to generate a profit for taxpayers if they try to maximize the strength of the financial system.
3. Despite the fact that shareholders lose close to everything in the bailouts of institutions, the fact of this massive systemic bailout provides too much moral hazard. Indeed, this sort of plan will give the Democrats ammunition to say that every industry under the sun (starting with GM, Ford, and Chrysler) should get taxpayer money.
4. Do we really want the government being the largest shareholder in some of our most important private enterprises? Related to the corruption issue and another thing the Dems have already tipped their hand on, I'm certain the Democrats will do everything they can impose non-competitive rules (and unions) on these companies, weakening American competitiveness in the highly competitive and critical world of financial services.
5. We lose the bully pulpit of being able to tell other nations, directly or indirectly (i.e. through IMF), that they should extricate their governments from their economies.
6. Whatever it does cost debases our currency at a time when a weak dollar and inflation are already big problems.
7. I've written this last, but it's not last in terms of importance: This must not be done in a way that lets the liberals claim that free markets don't work. This plan as laid out gives weight to their incorrect assertion that the current problems represent a market failure when what they actually represent is government failure. I don't believe in curing a government failure by making the biggest expansion of government since the New Deal...and likely with the same damaging permanent results. Doesn't anyone recognize that our 1930's turn toward a government-run economy made our Depression longer and deeper than it otherwise would have been, as demonstrated by the faster recovery of almost every other major western nation back then? If the Democrats can say that they've proven that free markets don't work, we will be doomed to a generation of liberals and RINOs destroying everything the Founders believed to be important.
Here's what we should do:
1. Do what Brian Wesbury suggested regarding the suspension of mark-to-market rules (FASB 157). I recognize that's in the plan now. That should be the first thing we do, and no assets should be allowed to be purchased for at least some number of days or weeks after that's implemented. Here are Brian's articles:
2. Implement some sort of last-resort insurance on relevant structured assets (again as suggested by Wesbury). I believe that's part of the current plan. This should be implemented as quickly as possible, but I wouldn't wait for the creation of that insurance program to suspend mark-to-market for the relevant debt securities.Also, how do you know Treasury will implement this part of the program, which is quite important for a suspension of FASB 157 to be as effective as it could be?
3. Explain publicly why this rule change is important. If you just say you're suspending some accounting rules, the public won't understand and won't think you're doing enough. If you explain with understandable examples why FASB 157 is a disaster in the current situation, you can win "hearts and minds" essentially by blaming accountants. It's for later, but I'd also use this mess to re-address (repeal) Sarbanes-Oxley.
4. Do nothing, or as little as possible, for at least two or three weeks following the suspension of FASB 157 (and hopefully the creation of this insurance market, though that's somewhat less important.) At most, let Treasury spend $100B in the first few weeks after that. Then let the free market do its work.
5. As soon as possible after any major government action or purchase, analyze how traders are trying to take advantage of the system. That's their job, of course, and it's what I would do if I were trading distressed debt. The point is not to try to hurt the traders but rather to get the government to react better and faster than it usually does (a naive hope, most likely) and figure out the weaknesses in the system that the opportunistic traders and hedge funds are exposing. Then modify the system so that advantage for those traders goes away, effectively gaining that profit or avoiding that loss for taxpayers.
6. Include language that bars any part of any future profit from the system from going anywhere other than into the Federal Treasury.
7. Make VERY clear how the government's bid price for assets will be determined.
8. I realize that this should be a little bigger than politics, but especially now everything is political. This is the House GOP's best chance in many years to make the nation proud of you again. It's the best chance to help minimize upcoming election losses. Explain this as a failure of government. Beat the hell out of the Democrats for turning Fannie and Freddie into the financial Frankensteins which have been primarily responsible for this mess. After all, it was not that illogical for trading firms to make bets and create investments based on the government guarantees of those institutions. That government guarantee was the first problem, but the Dems turning the GSEs into the enforcement arms of their "affordable housing" social engineering scheme is what really did us in. You guys should be screaming from the rooftops that this was NOT due to deregulation, and that the Democrats prevented proper regulation despite multiple attempts by the GOP.
When I hear Bernanke saying we take the plan or we get a recession, my answer is "recession, please". What we're looking at here strikes me as a patient with a bad headache being told he can get rid of the headache with a treatment that causes cancer.
If it isn't clear from the above, I'm suggesting that you vote against the plan and get as many other members as possible to do the same.
Best regards, and thanks for standing up for what's right the past few days,
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