On Judge Andrew Napolitano’s Freedom Watch last night, illness this conservative stepped into the lion’s den of libertarianism, hospital held my nose, buy and defended TARP. I was not alone in my viewpoint as the impetus for the discussion was Warren Buffett’s letter to the U.S. government praising the policy… although, unlike the sage of Omaha, I am not making $15/second off the back of the deal.
Why would I defend such a policy even though it goes against every capitalistic inclination I have? The simple reason is that, like it or not, it worked. Not perfectly, but it got the job done. One can argue the merits of letting the banks and AIG fail as a form of cleaning house and punishing bad behavior. But to speculate about what would have been had we allowed free market forces to decimate the entire banking, insurance and auto industry, and the unquestionable pain it would have inflicted on the entire country in the following months and even years is moot.
One would think that as I am in the energy business, I should know better. After all, we had a meltdown of credit in our space back in 2001 when Enron went under as suddenly and unexpectedly as did Lehman and Bear eight years later. In our business, Enron was the 800-pound gorilla, the firm through which so many other bilateral transactions flowed, guaranteed solely by the perceived credit-worthiness of the transaction counter-parties, not a third-party clearing mechanism. One month Enron stood atop the energy world like a colossus, the next it was bankrupt and the exposure that firms had either directly or through varying degrees of separation was enormous. Panic seized the energy markets and credit froze, making it impossible for marketers, producers and end users to hedge their risk as the dealers were unwilling to take any credit at all no matter how worthy. Sound familiar?
So what happened? Did the government declare Enron, the victim of its own scheming and mendacity, “too big to fail” and step in to guarantee its transactions? No. Enron was allowed to collapse, the dealers unwound their positions as best they could and, most important, the NYMEX stepped in with its ‘clearport’ system and fulfilled the role of the clearing house and credit eventually unfroze. Now the markets are more vibrant and robust than ever, thanks solely to the ingenuity and strength of the private sector. And the grifters that were Enron’s senior management were prosecuted, not rewarded with huge bonuses for their behavior.
Fast forward to 2008. A similar situation arose, but this time it was on an enormous, even global scale impacting the entire U.S. citizenry to one degree or another. Not just one industry of limited scope. In 2000, people outside of energy were never in danger of massive unemployment or even blackouts or gas shortages as the result of Enron’s shenanigans. It was a problem contained enough and small enough that a private sector entity, the NYMEX, was able to rectify in time. Not so in the fall of 2008. No private entity could have fulfilled the necessary clearing and confidence-building role to stabilize the markets. The problem was just too systemic and far-reaching. Only the U.S. government, with its power to tax and deficit spend and its multi-trillion dollar balance sheet, had the muscle to fulfill what was the de facto clearing house role and provide the backstop that would restore confidence.
What we debate now really is what would the world have looked like had the banks, AIG, the auto makers, etc. been allowed to fail which, under more normal circumstances, the capitalist and constitutionalist in me would have liked to see. We cannot know. Would unemployment be 15%? 20%? More? Would we be in a global depression that would last a decade or more? Or were Paulson et al. stoking the flames of hyperbole to better position their favorite bankers in the heist of the century? I will leave those questions to economists, historians, and the players themselves.
Conversely, had Enron been bailed out, would I be sitting here pontificating on how the government “saved the energy industry” unaware that a far better alternative escaped us? Possibly. But I do not dwell in the world of “what if” rather “what was.” And what was a global catastrophe looming — where millions were cast into unemployment, and millions more in the crosshairs of joblessness and financial ruin — was contained. Did some unseemly characters make out like bandits in this? Yes. And it sickens me. Nor have bail-out funds been used to support small businesses, the engines of job creation. This is especially disheartening but I cannot blame the banks but rather the government for giving both favorable conditions even though the government had the power at the table, and then setting up a carry trade bonanza, through cheap money from the Fed, and ever increasing debt service from the present and past administration, that no dealer can resist. Borrowing money for free and collecting interest on treasuries at a healthy spread is a much better deal for traders than risking their money on a small business. And as such TARP could have been better structured — if there was enough time. Again, historians will better judge these questions.
So I reluctantly support TARP knowing that it was unfair cronyism, even unconstitutional, but necessary nonetheless. There are two rules in life. Rule (1) Sometimes life is unfair; Rule (2) Rule 1 will always be with us so long as people are what they are. Middle Americans who played by the rules are suffering the effects of nefarious dealings from Wall Street, enabled by a socially engineering government and supported by many citizens who thought the music would never stop as they took out mortgages they couldn’t afford while thinking their rising house price would rescue them.
But punishing these good people further by allowing the country to (possibly) sink into a depression would have been a hollow justice. Sometimes you gotta do what you gotta do. Free-market capitalism and the constitution are among our noblest concepts and vitally important to the life-blood and character of this nation; they are what made us great, but they are not suicide pacts. And I ask those of my libertarian friends who love no government at all, those who claim they would have let the banks die, to consider the history of fascist states and remember that the rise of dictators and despots is often through the exploitation of major social/economic upheaval. America is not immune to this phenomenon. I was not willing to run the risk should the free marketers have truly underestimated the severity of the crisis and chaos which ensued.
Before anyone thinks I have become a turn-coat statist, I will say this with the utmost conviction: If going forward bailouts become the norm rather than a one-time mulligan for a once in a generation economic calamity that need not have occurred, then I will change my views on this. If we cannot learn from what happened, if we cannot take the second-life granted by the American taxpayer to mend our ways, then the next time, I will happily agree to give Adam Smith’s invisible hand carte blanche to raze the city on the hill—for we’re just doomed anyway at that point.