Written by Cliff Kincaid
By Cliff Kincaid
March 17, 2008
The questions come to mind as I reflect on a visit I had made as a high school student to the Sharon, Connecticut, estate of William F. Buckley, Jr. Buckley, a major figure in the conservative movement who recently passed away, had hosted members of Young Americans for Freedom and gave an inspiring speech about the free human spirit. It helped set me on my career as a conservative journalist.
It was at Buckley’s home in 1960 that the Sharon Statement was issued on the occasion of the founding of Young Americans for Freedom. Among other things, it said:
“That the market economy, allocating resources by the free play of supply and demand, is the single economic system compatible with the requirements of personal freedom and constitutional government, and that it is at the same time the most productive supplier of human needs;
“That when government interferes with the work of the market economy, it tends to reduce the moral and physical strength of the nation, that when it takes from one to bestow on another, it diminishes the incentive of the first, the integrity of the second, and the moral autonomy of both…”
Isn’t this written in plain English? So what accounts for the “conservative” editorial writers of the Wall Street Journal coming out on Saturday with a justification of Federal Reserve interference in the market economy through a taxpayer bailout of a private financial interest? “Just once we’d like to see what would happen if a big bank did fail, but the current general market panic arguably isn’t the best time to have that experiment,” the paper said. An experiment? I thought it was called the free market.
In his interview with President Bush, Lawrence A. Kudlow asked, “You have said time and again that you oppose government bailouts, that you oppose the use of taxpayer money to bail out. I want to ask you if that opposition applies to these large banks.”
Bush’s response was, “Well, these are unusual times. These are times that—where there’s a confluence of housing market risks and financial risks that require unusual action. And it’s very important for the American people to know that the Fed and the Treasury carefully weigh the—necessary to bring some order and stability versus moral hazard. And I think they’ve struck the right balance in this case, particularly when people look at the details of the transaction.”
But speaking for himself, Kudlow, a contributor to Buckley’s National Review who worked for Bear Stearns for eight years, defended the bailout. He said that Treasury Secretary Henry Paulson and Fed chairman Ben Bernanke “have done exactly the right thing.” But it wasn’t the conservative thing to do. It wasn’t consistent with the conservative and free market principles in the Sharon Statement.
For their part, our media are doing a terrible job of trying to explain how a bailout of this magnitude was actually carried out. We still don’t even know how much it will cost.
One of the feeble explanations was the Journal’s Saturday page-one story about Bear Stearns receiving “emergency funding backed by the federal government.” The paper explained that “A 1932 provision of the Federal Reserve Act allows the Fed to lend to non-banks if at least five of its seven governors approve. That provision was last regularly used during the Great Depression. It is meant to underscore that the central bank should lend to non-banks only in extreme circumstances.”
But later, the article revealed, “The Fed, with two governors’ seats vacant and one governor overseas and unreachable, invoked a special legal clause to approve the loan with just four governors.”
What is the precise legal and constitutional basis for what the Federal Reserve has done? How is all of this possible under a democratic system where the peoples’ representatives in the Executive and Legislative branches are supposed to make the decisions? Has the Fed become a tool of special financial interests?
On Fox News Sunday, host Chris Wallace asked Paulson the right question: “Why should the government, and thereby U.S. taxpayers, bail out lenders and borrowers who made bad decisions? And if they know they’re going to be bailed out, what does that do to the moral hazard argument that they don’t end up paying a price?”
But Paulson’s answer was similar to Bush’s. He said that “on the one hand, you’ve got a moral hazard. On the other, you’ve got what’s right for the markets, what’s right for the stability of the financial system, the U.S. economy.” He said that “All of these situations are situation-specific, depending on what’s going on in the markets at the time. You’re jumping to a conclusion about what the cost is going to be to U.S. taxpayers.”
But what is the ultimate cost? Paulson didn’t say and apparently doesn’t know. And why was Bear Stearns one of those “specific” situations? Could it have something to do with the fact that the Chinese had a deal to invest $1 billion in the firm?
It is interesting to note that Senator and presidential candidate Hillary Clinton has not denounced the bailout. It turns out that Bear Stearns is on the list of top contributors to her presidential campaign. J.P. Morgan, the firm that has now bought Bear Stearns, is also on the list.
Meanwhile, the trial lawyers are already out with an offer of legal help for Bears Stearns investors. One firm notes that the share price collapsed from $61.58 on March 12 to $2 on March 16. It says, “…what we don’t know is why shareholders in the company were kept in the dark for so long by Bear Stearns management, and why executives publicly attempted to assuage the investors when the company was crumbling behind the scenes.”
Will U.S. taxpayers be called upon to bail out those investors and pay off those expected lawsuits?
Can we have some answers to these questions?