Government Must Not Prolong the Market-Cleansing Process 

By Lewis K. Uhler

Abuse of the public treasury is not a new phenomenon.  Taxpayers have been the creditors of last resort for Chrysler, the savings and loans, defense contract overruns, the Boston “Big Dig” debacle, and countless other government excesses.  But the so-called mortgage (Wall Street) bailout we’ve just experienced carries us into new territory – and scary challenges.

It would be one thing for the president – or the Congress – to initiate and manage the response to the alleged crisis on Wall Street.  But to allow a hired hand – the Secretary of the Treasury (and his as-yet-unknown successor) – to initiate a bailout for his Wall Street cronies, and to control without any peer oversight or court review (as Henry Poulson initially proposed) the expenditure of $700 billion or so of taxpayer resources, is a new level of fiscal dereliction.  Why the president would endorse a plan that leaves him out of the loop in managing the response of his own administration is the final confession that he is not serious about fiscal discipline in his remaining days in office.

There is no mention in the Constitution of a Department of Treasury or a Secretary of the Treasury.  To give a person who holds such a non-constitutional office the power to bind our nation and its treasury to obligations for which there is no constitutional authority is patently absurd.

With respect to the details of the bailout, we should recognize that the problem was created by government policy and inaction.

● Government’s insistence, through the Community Reinvestment Act, that unqualified buyers be given mortgages set this problem in motion.

● Freddie and Fannie responded to their liberal political mentors – Rep. Barney Frank and Sen. Chris Dodd – and made tons of bad loans.

● Interest rates were kept low by the Fed, encouraging speculators to enter the market; as a result they joined in bidding up prices to unsustainable levels. (It’s estimated that speculators represented an unprecedented 25 percent of home buyers during this housing bubble, creating an oversupply of homes and assuring the foreclosure rate we have been experiencing.)

● The cartel of government-licensed rating bureaus obviously failed to do their jobs of properly rating the sub-prime mortgages which were securitized and sold around the world.

The bailout need not risk a heavy loss for taxpayers if some simple principles guide government action.

● Change the “mark-to-market” rules so mortgage “packages,” which contain mostly performing loans (only about 7 percent of home loans have run into trouble) are not put on the block at fire sale prices and do not artificially undermine otherwise healthy companies.

● Let precarious financial institutions file for Chapter 13 bankruptcy and do a “workout” over time, as the bankruptcy law encourages, thus saving value for shareholders and for employees whose retirement may ride on the outcome.

● Loan funds to financial institutions that are having problems rather than buy their assets, reducing taxpayer exposure and maintaining the viability of the private companies.

Above all, government involvement/interference must not prolong the market-cleansing process vital to rapid recovery.  Housing prices are testing the bottom now.  Turnaround can happen quickly if government doesn’t abort the process.  Markets work.  Our elected and appointed officials must once again accept that – and get out of the way.

Lewes K. Uhler is president of the National Tax Limitation Committee in Roseville, California.

October 10, 2008