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Failure to Act will Cost Much More in Dollars and Pain


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I regard this bailout as a positive, as it’s something only the federal government can do.  The result of not doing it would be far more costly to the people of our country in many ways, and the Federal government would lose far more tax revenue from a serious economic downturn than the cost of the bailout.  I believe the bailout will cause the economy to bottom out and start upwards again – far sooner than would occur without this government action.

It is not going to cost $700 billion as the press irresponsibly trumpets.  The government may indeed buy $700 billion of mortgages or mortgage packages that are in trouble.  If the underlying real estate covered by the mortgages is worth zero, it will indeed cost the government $700 billion.  But the underlying property is far from worthless.  You may remember the Savings & Loan crisis of the late ‘80s.  The government took over many S&Ls which had gone broke for somewhat different reasons than the root cause of the present mess – though the S&Ls were also a mess. 

Those S&Ls held several hundred billion dollars of real estate through defaulted mortgages.  The government created the Resolution Trust Corporation (RTC) to sell the real estate and recovered 65-70 percent of the value of those mortgages through an orderly sale of the property.  In hindsight I think they rushed the sale of the real estate a bit and could have recovered more if they held on to it longer and given the market more time to recover.

It's the same with the "bailout" of AIG.  The press gives the impression that present action by the U.S. government has already cost the taxpayer $85 billion.  Not so unless you count the value of AIG at zero and it is far from that.  It is (purportedly) the largest insurance company in the world.  That’s big!  The government got rights to about 80 percent of AIG stock.  Remember the "bailouts" of Chrysler and Lockheed?  As I recall the government saved both companies and made some money in the process by obtaining rights to some of its stock in exchange for guarantees and capital infusion – very much like what Warren Buffet has now done in providing additional capital for Goldman Sachs.

I was involved in another similar situation which occurred in agriculture in the late-1980s.  The farm economy was very stressed due to falling land prices plus low commodity prices.  Because farmers were stressed, their principal lender (for farm land), the Farm Credit System, was headed for bankruptcy.  The FCS was an independent government agency.  If it had failed, it would have cost the government many billions.  In the Senate the FCS came under the jurisdiction of the Agriculture Committee, of which I was a member.  More directly, it came under the credit sub-committee of the ag committee.  Sen. David Boren, a Democrat from Oklahoma, was its chairman and he recruited me to be a member specifically to deal with the farm credit crisis.  So I became the ranking Republican on the sub-committee.

The FCS was organized in nine (as I recall) districts around the nation, with one of the headquarters in St. Paul.  The president of our district, a very smart banker named Larry Buegler, had come to me stating that if we gave the FCS some flexibility, some time, and the ability for healthy districts to absorb failing districts, they could work their way out of it. 

Farm land mortgages generally had a single payment a year (after the crop came in), not monthly payments like your home mortgage.  As I further recall the FCS could not accept less than the full payment so farmers were either paying it all or nothing - and enough of them paid nothing to create the problem.  So Dave Boren and I held hearings.  Then we drafted a bill, got it passed in both Senate and House, which gave the FCS both time (for land prices to stabilize) and flexibility in dealing with the farmer borrowers.  Several weak FCS Districts combined with healthier ones.  The result: Time did its work and helped stabilize land prices and the Farm Credit System worked its way out of its problems and didn’t cost the government a dime.  The oversight agency we created was disbanded (not many government agencies ever are!) when the FCS was once again healthy.  It was a proud achievement for Dave and me.

I tell these stories to say: credit problems are not new.  Nor is government intervention new.  The same mistakes keep being made but always with new wrinkles and twists.

The government is right to act.  Failure to act will cost the economy and the American people far more in dollars and pain.  The government would be right to restrict huge payments or parachutes to officers of these companies.  The cost to the taxpayer will not be nearly as high as the press is saying.  Our country and our economy have survived far worse.  Indeed, the economic jolt of 9/11 was probably worse than this credit crisis – and a crisis it is that requires the government to act.

Rudy Boschwitz served as a United States Senator from Minnesota from 1978 to 1991.

This commentary originally appeared in Volume 4 of "What's a Free Marketeer to Think?"
Click here to read the entire volume.