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At a gathering last night of intelligent young conservatives, I was defending the point that the TARP and some kind of fiscal stimulus had been absolutely essential last year – that otherwise the world economy might have plunged into Depression – and that conservative organizations like the Heritage were right and courageous to have supported the Obama administration’s actions at the time. We can criticize some of the details of those actions, especially some of the payoffs to Democratic interest groups embedded in the stimulus and the budget for the second half of 2009. But as an AEI colleague of mine put it, in those critical hours it was more important to be fast than to be smart. And it’s not like the GOP does not sometimes deliver payoffs to our interest groups too.
This defense met some resistance. The dominant view in the conservative world rejects the decisions of last year, and even questions whether conditions were really so very dangerous after all.
One attendee said something very thought-provoking. “Maybe it was a good thing we weren’t in power then – because our principles don’t allow us to respond to a crisis like this.”
My answer: If your principles don’t allow you to save your country when it needs to be be saved, then there’s something wrong with those principles.
John Guardiano offers an idea above about how conservatives might respond to today’s crisis. I don’t share his point of view exactly … given the extremity of the country’s fiscal challenges, I see no responsible way to sustain a defense budget over 4% of GDP. If that means winding up Iraq, Iraq is going to have to be wound up. If that means ending the Afghan surge by January 2011, the Afghan surge will have to end in January 2011.
What is clear to me is this:
* The world financial system nearly collapsed in September-October. It had to be saved. TARP was messy, TARP rescued a lot of people who didn’t deserve rescuing, but TARP was indispensable. We’ve lived through a 1929-31 type experience, but without TARP we might have rediscovered the horrible difference between a 1929-31 style severe recession, and a 1932-33 style economic collapse.
* Monetary policy had done all it could do for the US economy by January 2009. Fiscal stimulus was needed. I’d have preferred a payroll tax holiday to the spending measures put in place by the Obama administration, but I prefer those spending measures to doing nothing. Those spending measures, including cash for clunkers, cushioned the fall of the US economy in the second quarter of 2009, and they reduced the rate of decline to almost zero in the third quarter. They offered real (if expensive and inefficient) help when help was needed.
* The indications are that employment recovery will be slow and painful. (See the ominous words of San Francisco Federal Reserve board president Janet Yellen here: “The strength and durability of the expansion is in question. … The danger is that demand may grow at too anemic a pace to support vigorous expansion.” Republicans must – MUST – offer answers to this predicament, and our usual inventory of policies will not suffice. A capital gains tax cut will do little at a time when almost all investors are looking at huge accumulated capital losses.
* The Obama administration’s most serious economic policy failure has been its inability to devise a policy to remove the bad debts from the books of financial institutions and get them lending again. Let’s criticize them for that! But our criticism will only have bite if we have an alternative remedy to offer. How can we do that if any attempt to address the problem elicits only angry cries of “No bail outs!”
* There’s a big difference between addressing a systemic financial crisis and rescuing individual non-financial companies struggling with chronic economic failure of their own making. Condemnation of the GM and Chrysler bailout is a valid and useful bright line to separate Republicans from Democrats.
* No responsible governor could have refused the federal money on offer in 2009. States must balance their budgets. In the span of 12 months, tax revenues collapsed for most states: by 11.5% for example in Florida. What was Gov. Crist supposed to do about that? Chop state spending by 11.5% on six weeks’ notice? And what effect would it have on the nation’s economy if big states were laying off teachers, halting all road maintenance, and closing hospitals? If we make refusal of stimulus funds a litmus test of political acceptability, no sitting governor who cared about his or her job would be eligible for a Republican nomination for anything. We’d be left only with the governors who had physically or mentally checked out of their jobs: the Sarah Palins and the Mark Sanfords.
But we can thanks Bush for “abandoning free market principles to save the free market” probably the worse piece of legislation ever passed by quite possibly one of the worse presidents of the 100 years.
sdspringy: Instead of allowing financial institutions to fail, thus wiping out the bad debt, the taxpayer will be made the patsy.
If those institutions had failed, the commercial paper on which our entire economy runs would have suddenly lost its reputation as a temporary storehouse of value.
When one money market fund “broke the buck” and was in danger of folding (for the first time in the history of such funds), the danger was clear to EVERYONE except ideologues. A run on money market funds would have destroyed the market for commercial paper.
Commercial paper is used to fuel bank ATM machines. It’s used to make credit card payments. It’s used to make payrolls. It’s how large corporations work–on these ultra-short-term IOUs. If the market for commercial paper had dried up, ALL those transactions would have stopped cold. Your credit card wouldn’t be honored anymore. Your bank ATM card wouldn’t work anymore. And your employer, if it’s a large corporation rather than a small family farm, would be unable to pay your wages.
Finally, there was $40 trillion in bad debt–those notorious credit default swaps. It couldn’t be “wiped out,” because there isn’t enough money in the entire United States to pay it off, or to withstand the hit if it had to be written off. It represented more than three years’ worth of the entire United States GDP. If YOU ever go into debt representing triple your entire net worth with no hope of paying it off in your lifetime, you have no choice but to declare bankruptcy. Would you have liked the United States to declare bankruptcy?
ADAM SMITH IS DEAD.
We don’t have an economy based on atomistic transactions anymore, backed up by gold as a neutral storehouse of value. We have an interdependent economy based on the shared assumptions that dollars, commercial paper, and other ultra-short-term instruments are safe. If those assumptions are shaken, our economy goes into the toilet.
I’m tired of arguing this with people who don’t understand how our modern economy works. It’s based on shared assumptions, not gold. And those assumptions can be shaken.
Chekote: Markets are rational.
What was rational about the “dot.com” bubble???
Why would markets bid up the stock prices of companies to astronomical levels, even though those companies had no earnings???
SFtor1: In most countries it would be rather sensational to see a discussion of whether the second largest party was fit to govern due to ideological hang-ups and a related stated intention to destroy government from the inside.
It’s due to a combination of ignorance and ideological zealotry.
We live in a mixed economy, not a laissez-faire capitalist economy. We live in an economy where the “full faith and credit” of America is all that we have to back up our currency and commercial paper and the U.S. bonds that foreign countries buy. We live in an economy where the promises of the U.S. government (via the Fed and the FDIC) are “as good as gold.” We can get away with this because we’re a superpower, not a Third World banana republic. But if that “full faith and credit” is ever shaken (as it was in 2008 or as it would be in a global thermonuclear war), all of our money instruments would lose much of their value.
Some on the Right just don’t like this, so they pretend that we can have policies that pretend it’s not the case. And since they don’t like it, they don’t bother to learn how it works in practice. Many are unaware that payrolls, credit cards, bank ATM machines, etc., all work on ultra-short-term loans, called commercial paper (which is electronic these days rather than physical paper). If businesses start losing faith in such loans due to the credit markets failing, the whole structure collapses.
David, I think you’ve got a bad case of Obama-ism.
You question whether or not conservatives can govern based on their negative policy reactions to the marketplace and financial crisis of 2008-09.
Speaking yesterday, former President Geo Bush said it well: “I went against my free-market instincts and approved a temporary government intervention to unfreeze the credit markets so that we could avoid a major global depression. (H)istory shows that the greater threat to prosperity is not too little government involvement, but too much.” He went on to say, “As the world recovers, we are going to face the temptation to replace the risk and reward model of the private sector with the blunt instruments of government spending and control.”
Conservatives can govern. It might not be the way nor the policies that you and some of Obama’s Chicago Thugs would prefer, but they can govern with the right leadership. You have a penchant for reducing the conservative or GOP position on issues advanced by Obama to “Just Say No” –which is a theme and charge repeated just about every day at the DailyKos and the DemocratUnderground.
It doesn’t just doesn’t sell, David. GOP leaders have advanced many alternatives to the latest “perfect” solutions presented by the Democrats. It politically benefits the White House and Obama to ignore the policy recommendations and reduce them to “Just Say No”.
But why you? I thought you were interested in building a new majority of conservatives in America… and frankly, David, we all need to start by agreeing that digging these liberal holes deeper isn’t a good solution for the moment, for the day, for the quarter or for the next generation. Remember the Obama promise that if we passed the Stimulus Spending Spree, it’d keep inflation from going over 8%?
You claim that “TARP was indispensable”. Some trolls here claim that if we hadn’t done TARP, Goldman would have failed. So what? I watched Goldman “experts” sell all kinds of derivatives in the multifamily housing and bond markets for years… helping state agencies shave 35-80 basis points off a financial instrument here, shave another 55-75 basis points off another there… meanwhile, raking in the fees while telling the client that if the market goes north, you make money… if interest rates go north, you make money… if your exposure on this derivative doesn’t make you money, at least you’ll be held harmless from bond buyer speculation… blah, blah, blah.
Goldman was doing what Goldman does best: selling fear and speculation. And they made a ton of money off it all, too. In Michigan alone, with just one state agency, Goldman fees amounted to $3.9m in a 5 yr period from Oct 2000- Sept 2005. “Savings” to the state agency’s portfolio? About $6.1m. When asked in public testimony, the state agency director at the time quipped something like “You gotta spend money to make money”. Meanwhile, that $4m could have been leveraged to build an additional 280 units of housing for the poor in a state where the waiting list for affordable housing is 38-64 months in most places.
We all know well that liberals are quick to spend other peoples’ money, especially taxpayer funds. Just because conservatives don’t see the wisdom in that approach doesn’t translate into they can’t govern.
We have to stop digging these liberal holes. AIG and other TARP recipients are now a concern to the Obama WH because the Obama WH’s anti-executive compensation controls are resulting in a brain drain before the feds get TARP repaid. We reap what we sow. Stopping the insanity has to be the first step toward a return to responsible govt… for you to miss that and miss the lesson of your former boss is a shame. Understandable on your part, but still a shame.
garyp: Somehow I imagine you aren’t nearly smart enough to grasp that, or the fact that [Teddy] Roosevelt was a disaster, and NOT a Conservative, but a “progressive.”
Teddy Roosevelt’s face is on Mount Rushmore.
History has made its judgment about him–he was one of America’s very greatest presidents.
We are conservatives, NOT reactionaries.
Stop fighting this losing battle to return our economy to the 19th century.
History has made its judgement there too: Antitrust laws, the income tax, the social safety net, the Federal Reserve and the FDIC are all good things. We instituted them for good reasons, not because we all went crazy or because were bamboozled by Commies.
phesoge @51 says: “But we can thanks (sic) Bush for “abandoning free market principles to save the free market” probably the worse piece of legislation ever passed by quite possibly one of the worse presidents of the 100 years.”
Not true.
Carter was the worst president in the history of our Republic. He beat out Andrew Johnson, the hapless Southerner who followed Lincoln.
As for the worst legislation ever passed by a president… I’d recommend you get a community college in Wisconsin for a fast course in civics, phesoge. Presidents don’t pass legislation; that’s Congress’s job. Presidents either sign ‘em or veto ‘em. I thought libertarians were a smarter bunch? You’re letting your team down, dude.
“Stop fighting this losing battle to return our economy to the 19th century.”
Stop fighting this losing battle to keep our economy mired in the early 20th century.
“History has made its judgement there too: Antitrust laws, the income tax, the social safety net, the Federal Reserve and the FDIC are all good things. We instituted them for good reasons, not because we all went crazy or because were bamboozled by Commies.”
“Good things” Huh? Good is a moral word. The question should be are these effective things. If so, keep them, if not, update, discard or replace them. And of course beware unintended consequences. Every one of these “good” things has had “bad” side effects.
Sinz54 asks, “What was rational about the “dot.com” bubble???”
The rational part was when reality showed up and the bubble popped. Markets may be rational, but nobody says they’re perfect.
Sinz said:
>History has made its judgement there too: Antitrust laws, the income tax, the social safety net, the Federal Reserve and the FDIC are all good things. We instituted them for good reasons, not because we all went crazy or because were bamboozled by Commies.
Good point. Conservatives shouldn’t go back to the 19th Century. They ought to take a page from the mid-2oth.
The Republican Party and, by extension, the Conservative movement, needs to accept that Americans, by and large, like Big Goverment. The Republican Party needs to be about consensus building and competent governance which acknowledges the role of government in peoples’ lives while excercising prudence and good judgement about its reach.
“The Republican Party needs to be about consensus building and competent governance which acknowledges the role of government in peoples’ lives while excercising prudence and good judgement about its reach.”
That’s worth repeating. But, it would leave the ranters and snarlers with nowhere to go… another good reason for it.
>“I went against my free-market instincts and approved a temporary government intervention to unfreeze the credit markets so that we could avoid a major global depression. (H)istory shows that the greater threat to prosperity is not too little government involvement, but too much.”
This, to put it mildly, is an utter crock spewed forth by a man who is, arugably, the worst President of the last 80 years.
Has any administration since the mid-1960′s extended the reach of government in scope, size and cost more than the second Bush Administration? (Hint: the answer is the opposite of yes)
President Bush lavished all sorts of favors, perks and subsidies on favored industries and wealthy individuals at the expense of the American taxpayer. He enacted, with majority support from his party, a wasteful set of tax cuts, a huge expansion of Medicare, two costly, open ended foreign wars all while giving us the largest expansion of the powers of Federal law enforcement agencies in history.
Free market? Small goverment? By what standard?
Besides, I’m still waiting for someone here to tell me what exactly the phrase “free market policies” means.
I mean, Scandanavian countries are “free market” societies. So is the rest of Western Europe. And Australia. And New Zealand. And Japan…etc.
Echoing some of what KL7212 mentioned:
It is a fantasy to pretend we are seeing a battle between true “free market” capitalism, and socialism. What we have now is corporatism, whereby private interests have a near-stranglehold over the government, regardless of which party is in power.
Goldman Sachs, McDonnell Douglas, Blackwater; these companies do not want free market capitalism, they want to become teat-sucking favorites of the government.
The best way to restore freedom to the marketplace would be to shut off the spigot of money to these entities, forbid them from lobbying, and break them into smaller pieces so whatever damage their failures cause, it would not be systemic.
Frum, I was about to chalk up this article to opinion differences of policy until you defended the cash for clunkers program. I mean—seriously?! If you’re going to take aim at conservative policies, at least do so from an empirical basis. Or perhaps you can’t because it would defeat your own arguments. Edmund’s study on this shows that car sales would have more or less been the same without it, and all it did was shift purchases by a few weeks, compressing sales of a few months into a few days as folks waited for the $4K rebate which really translated to $24K of tax payers $/car. It’s not clear at all this program increased car sales over the year from what is normal, nor boosted car production from the norm. Not to mention the unintended consequences of hurting used car dealerships, and destroying real capital—that is, used cars that someone else can use or sell. Morgan Stanley economists actually think this program hurt non-auto consumption which fell from a rise the month before the funds from this program were dispersed. At best, this was an unnecessary program.
As a pragmatic conservative, I was neither against TARP, nor a targeted stimulus per se, but I was against the porkulus bill that did very little to stimulate anything. The WSJ shows data– the stimulus bill did squat: http://online.wsj.com/article/SB10001424052970204731804574385233867030644.html
Consumption declined after passage of the stimulus bill, and gov’t spending that directly did contribute to GDP growth between the 1st and 2nd quarter was mostly defense spending. So if you ask whether conservatives could govern, I think they could have come up with less costly and more targeted stimulus bill. And it’s just not those extreme right wing conservatives yahoos David—the majority of people polled do not believe the stimulus has worked either, and are against any type of second stimulus package. I can only conclude you drank the Obama-media kool-aid long ago.
By guaranteeing to rescue the top banks in America no matter what, the Federal Government is now the entity that is overextended. We are now going to have lethal inflation. And the next slump or crash is going to be brutal, because no commercial lender is going to put their neck out when the Feds will have to take the burden. And we will have one, and we will have one before we can recover the splurge of this failed bailout program.
When a currency collapses the only proven way out is to scrap the government that issued the paper.
As usual, this is a false debate between passing TARP and the collapse of America.
Closer to the truth is the assertion that TARP has made America significantly weaker. It has hurt our economy massively through creating a moral hazard and furthering embittering the middle class to the capitalist (i.e., banking) establishment.
TARP, and the entire central planning mentality behind it, is what will ruin America if anything will. Those purported “conservatives” who do not understand this plain fact will lead us down the path of destruction, with all good intentions.
David, you really should move this blog over to HuffPo. There is nothing remotely conservative about your positions.
TARP as it was structured is indefensible to anybody but an unprincipled banker, who favors privatizing gains and socializing losses, or to a big government liberal, who sees TARP as a necessary price to pay to take over the finance sector.
The notion that America would have collapsed if Goldman failed is a fallacy. The banking crisis could have been averted by providing liquidity on a temporary basis, then liquidating the insolvent institutions. As a result of leveraging the Treasury to save Goldman and other big banks, America now faces at least a decade of economic stagnation, zero or negative returns on investment assets, deflation of leveraged assets like housing, an anemic job market, and a declining currency. The middle class is going to watch their wealth and purchasing power evaporate, while bankers on Wall Street will collect billions of dollars in bonuses, courtesy of the U.S. Treasury.
There is nothing conservative about this plan. This is anathema to a conservative.
“TARP as it was structured is indefensible to anybody but an unprincipled banker, who favors privatizing gains and socializing losses, or to a big government liberal, who sees TARP as a necessary price to pay to take over the finance sector.”
What if it’s not either of those things, COI? What if it was simply an extraordinary measure to prevent a great calamity?
I supported TARP but I hate it. I hate the fact that the bankers who got us into this mess now view themselves as survivors rather than perpetrators. I hate the fact we’ve poured $750 billion into rescuing large businesses from their own errors in judgement while continuing to lobby in Congress against the sort of regulation that would have prevented this mess in the first place.
I hate the fact that these p****s have reduced credit lines and jacked up interest rates on people like me who’ve managed their credit wisely and always paid their bills on time after taking MY TAX DOLLARS. Just when I needed my lenders the most–my income has been cut in half since 2007–they’ve piled on and made my life far more difficult while continuing to pay lavish bonues to themselves ON MY DIME.
But I still supported TARP because I think this awful recession would have been a depression without it.
Churl sez: “The rational part was when reality showed up and the [dot.com] bubble popped. Markets may be rational, but nobody says they’re perfect.”
The free market created the bubble, Churl. We can agree on that, right?
Now the supposed benefit of a free market is that it allocates resources effectively, or at least more effectively than other systems. The free market system failed to allocate resources effectively during the dot.com and real estate bubbles, and will continue to behave in exactly the same way going forward.
Now I leave it to you to figure out whether anyone stands to gain from bubbles, and whether we will have more bubbles in the foreseeable future.
“One attendee said something very thought-provoking. “Maybe it was a good thing we weren’t in power then – because our principles don’t allow us to respond to a crisis like this.”
…………This alas is the position of much of the conservative movement today……….every day their reps elected and unelected stand up and voice opinions that are basically nihilistic and antideluvian in 21st Century America……and the soundbites get replayed at venues like this……..The GOP is simply unfit for government at present……..and the country knows it whatever the latest opinion poll says about some aspect of policy about which most of those polled have skimpy knowledge at best.
Reason60: The best way to restore freedom to the marketplace would be to shut off the spigot of money to these entities, forbid them from lobbying, and break them into smaller pieces so whatever damage their failures cause, it would not be systemic.
I agree to this extent:
Any corporation that is “too big to fail” is too big to exist in its present form.
Unfortunately, it’s gotten out of our hands. The Credit Default Swap (CDS) market was an international market of speculators. AIG, the giant insurance firm that got bailed out, is a multinational firm with headquarters in New York, Europe, China, and the Middle East. I don’t know how to break up a firm like that with unilateral U.S. action.
It seems to me that the “too big to fail” problem with multinationals will require negotiating some kind of new international agreement.
WillyP: Closer to the truth is the assertion that TARP has made America significantly weaker.
There was no alternative.
In September 2008, the economy was crashing into a depression. The collapse of the market for commercial paper would have caused the entire economy of the United States (except for some isolated farm markets) to grind to a halt.
How high would unemployment have to go before you would modify your free-market ideology with government action? 12%? 15%? 20%?
What I did not see from congressional Republicans in the fall of 2008, was any recognition of the severity of what we were facing. They reminded me of the crew of the Titanic, assuring the passengers that “this ship is unsinkable,” even while the ship was listing badly and sinking into the water.
We were headed for a depression. Really. Not quite as bad as the one in the 1930s (because today we do have a social safety net), but certainly as bad as some panics in the 19th century (in which unemployment rose to some 15%).
Sinz, your history is wrong, as well as your theory.
The crash of 1929 led to a mild recovery shortly thereafter:
http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20091018/REG/310189995/1011
We’re at about the same point.
What was it again about that “stimulus?” Unemployment won’t go over 8%? We’re at 10% and climbing. You just wait until the commercial real estate market collapses. It’s coming. Then we’ll hit 12%, at least.
You cannot plug bad paper by printing more money. There M-U-S-T be liquidations. I’d rather liquidate all at once and then rebuild. Putting it off further and further serves only to dispirit the population. Wages must fall. We all must consume less and save more to repay debt. There’s no ready-made solution.
WillyP: We’re at 10% and climbing. You just wait until the commercial real estate market collapses. It’s coming. Then we’ll hit 12%, at least.
OK, fine.
What would YOU do about it, if YOU were the POTUS today? Just sit back on your laurels and wait for the economy to self-correct?
Conservatives were recommending payroll tax cuts and other tax cuts. Even Larry Kudlow, who’s no liberal. Kudlow knew that government action was needed; he just disagreed with Obama as to just what action.
You suggested providing “temporary liquidity” to the financial institutions before phasing them out. Well, there was some $40 TRILLION dollars in Credit Default Swaps–that’s triple the GDP of the entire United States for a whole year–which were feared to be worthless, since they had been tied to securitization of subprime mortgages. There was no way for the U.S. to liquefy that market–we don’t have the money.
All we could do is prop up the system and let it keep running, rather than having it fail and having the entire rotten structure of derivatives collapse.
First of all, tax cuts are not what any normal person calls “intervention.” It’s the abatement of intervention.
$40 trillion which was never there. So let it default. Ask yourself the question – what does having worthless paper retain a huge nominal value do for anyone? I can write “$40 trillion” on my napkin, and it remains a napkin, valueless as any other napkin. If you say, Loans are made against that napkin!, well, yes – that’s the whole problem.
I never suggested temporary liquidity. If I did, I’d like to know where. I am for liquidation, so that assets reflect their real market prices, and we can rebuild in a sustainable (unrelated to the sentimental “green” use of the term) manner. We need to reform entitlement programs, and slowly phase them out before they crush my (future) children’s generation.
“All we could do is prop up the system and let it keep running, rather than having it fail and having the entire rotten structure of derivatives collapse.”
That’s the Frum line, to be sure. Can’t say I consider him a leading light. In any event, the engine will seize up, whether you like it or not. I’d rather have a 4 cyl. stall than a 12 cyl; it’s less complicated and cheap to fix.
err, that is, cheapER to fix.