See also: Lawrence Summers: Taxpayers can still benefit from the bail-out, Financial TimesThese guys have a lot of courage if not irresponsibility. Not too shockingly, Dow drops by 7% (by 778 points, biggest absolute drop in history), S&P 500 by 8.8%, and Nasdaq by 9.1% (and oil by 10%). On the "previous" black Monday, in 1929, Dow dropped by 12.8 percent so these quantities (but not others!) seem to be comparable by now. ;-)
Some of the Republicans have already claimed that the GOP with its loud "No" was reacting to Nancy Pelosi's partisan speech: well, I must tell you, that's a pretty bad policy to decide about the world economy according to an emotional reaction to an irrelevant bitch.
While I generally don't like interventions as a matter of principle, fundamentalism in these matters is simply a bad approach. Even though greed, irrationality, and panic is behind the bizarre developments, it doesn't mean that people should use the same values - greed, irrationality, and panic - to design the future.
In my opinion, the testimonies of virtually all of the liberals and conservatives who opposed the bill were populist and ill-informed in character. If someone says that "ordinary people" are innocent in this situation, he's simply neither a right-wing politician nor a realistic one. These problems began because many financially unsubstantiated mortgages were allowed for people who couldn't naturally afford them.
These transactions always had two sides, not one: the insufficiently liquid borrowers as well as the banks. Whenever they agreed about a mortgage that wasn't sensible, greed and irrationality played a role even though the detailed reasoning why the transaction was a good idea was, of course, different for the two sides. In the case of the lenders, political correctness has surely contributed, too. Without political correctness, the bankers would immediately know that most of those people were simply not wealthy enough to afford certain houses.
At any rate, the housing prices grew more than they should and people who were dangerously in debt were "owning" many of these houses. The housing bubble has inevitably burst and the trend has reverted.
But all these events belong to the past. They are part of the initial conditions of a physics problem that the lawmakers were supposed to solve today. I am afraid that their solution is incorrect.
Another opinion that baffles me is the belief of many of the lawmakers that the sentiments and events on Wall Street do not influence the "ordinary people", whatever is the definition of this bizarre, Marxist-sounding category. I view this opinion as a stunning misunderstanding of the economy. Whether someone likes it or not - or finds it politically incorrect or not - the banks, millionaires, and billionaires are much more important for the life of the whole U.S. and global economy than generic, "ordinary people".
It may surely sound as a very decent idea to try to punish the people on the Wall Street for the sick state of the financial system but what many people don't realize is that such a punishment will also (or especially) punish the "ordinary people". Some of them are also guilty - like those who have borrowed something they shouldn't have (and cheated when they described their financial situation) - and many of them are innocent.
A proper rational solution requires economics expertise rather than cheap populist and ideological references to "constituents" who have no idea what's going on and what will happen in different scenarios either. Bernanke is one of the leading U.S. experts in economic crises and Paulson has an extensive - and successful - experience with managing big financial institutions: his present job is not too different. Their calm and professional comments made much more sense than the comments of the passionate lawmakers.
I enjoyed e.g. the debate between Ron Paul and Ben Bernanke - they clearly agreed about most things even though their final, binary answers were different - but most of the other lawmakers simply didn't look like high-quality politicians to me.
While I am an enthusiastic advocate of the free markets, I believe that there exist several basic macroeconomic numbers whose reasonable values have to be controlled by the Feds and the administration. The value of money (whose time derivative is called the inflation) and the overall confidence in markets are among them. Just like the government has to guarantee that money is not counterfeited (if the system depends on the money, and the present world does), they must make sure that the money's value (and the accessibility of loans, which is closely related) is not compromised by other means. There exist certain assumptions that are necessary for capitalism to work. It is similar to the evolution of biological species: it works almost automatically but the physical laws must guarantee certain essentials of life.
Let me use the most general, non-technical description I can find: it is absolutely clear that if the confidence in the capitalist system itself goes to the trash bin and if most of the "assets" that have flooded banks and institutions become "toxic", unquantifiable, and unexchangeable, capitalism can't work well simply because capitalism depends on a certain degree of confidence in the system, in its players, on a well-defined value of assets, on easy enough trade, and on the positive value of most companies' actual assets - much like life depends on constant laws of Nature, well-defined numbers of copies of DNA molecules, the ability of living creatures to move, and the "alive" (as opposed to "dead") status of most animals in Nature that haven't yet been eaten or recycled. ;-)
Once we're talking about scary scenarios - where capitalism may become disrespected or even replaced by something else - I am surely in favor of interventions that should otherwise be as market-friendly as possible (and the reverse auctions etc. in the plan were surely highly market-based). You know, Central Europe can offer you many examples of situations in which the capitalism and freedom itself were replaced by something fundamentally different for many decades.
Well, I would prefer to sign a few papers and print a couple of otherwise unphysical and meaningless pieces of paper (such as banknotes). If I could have prevented the Great Depression after 1929, using a time machine and the present knowledge of economics, I would have done it. However, it is likely that the best solution would have to start years before 1929 just like the best solution to the current mortgage-related crisis would start already in 2003 or so. ;-)
The Feds and the administration should be in charge of the macroscopic degrees of freedom: there are still millions of more microscopic degrees of freedom left to the invisible hand of the free markets that naturally adapt to the external environment, including the macroeconomic parameters.
Because there is a feeling of an evaporating credibility of the markets that leads to dropping stock markets and increased volatility, something should be done about it. It's bad that the people who are actually important in the financial system (and wealthy) don't have a meaningful representation in the U.S. Congress. The body seems to be full of people who think that it doesn't matter whether anyone trusts any stocks, banks, funds, lenders, borrowers. But they're wrong. It matters a lot. More precisely, it probably doesn't matter for them because the number of jobs in the Congress is unaffected by the economy and their financial situation is arguably independent of the stock markets and banks, too. But the voters (including pensioners, investors, small businesses, large businesses, consumers, and charities) may live in a different world.
Let's hope that their mistake won't have excessively dramatic consequences.