What now?

The whole world is watching our financial meltdown.  Iran blames it on our "military engagements" worldwide.  The two current candidates for president blame each other's parties.  Mexican workers, both legal and illegal, are starting to head for home at record rates.

I'm done trying to figure out who's at fault.  I'm pretty sure I have a good idea of the two who did the most to hurt the economy.  Others are pretty sure they know, too, and their opinions are completely opposite mine.  

The question is no longer "Whose fault is this?" but "What should we do now?"

I do not think the current bailout plan is the answer, for several reasons.  First, I do not trust the federal government with $700 billion to spend how it sees fit.    Second, I do not believe that the government has its taxpayers' best interests at hear so much as its own.  And last, but certainly not least, I do not want to see our government turn our economy into a copy of the socialist command economies that have failed repeatedly around the world.

Donald Luskin, of the National Review Online's financial corner, has three very good questions that should be answered before any bailout occurs.  Those are "Is it necessary?  Will it work?  Is it morally justifiable?"  His answer to the first question is a simple "We don't know."  And we really don't.  We have two or three past instances to compare this current situation to: the stock market crash in 1929 that led into the Great Depression, and the stock market crash in 1987 that actually led to a market resurgence.  

In the Depression, we had more bank trouble than we did in 1987, and government interventions that stretched it out all the way to WWII.  I, and others, think that the Depression stretched out as long as it did thanks to the increase in socialist policies and programs that FDR instituted to try to manage the problems.  Though the changes were initially meant to be temporary, the federal government has only continued to grow from that time to this.  The crash in 1987 did not lead to a depression; on the contrary, the market ended the year way up.

There is no way to tell if a government bailout is necessary at this point.  We simply don't know if the economy will react like it did in 1929 or if it will react like it did in 1987.

In Luskin's opinion, the answer to the second question, "Will it work?" is the same: we don't know.  I disagree: with each government intervention--the Bear Stearns buyout, and the Fannie Mae, Freddie Mac, and AIG seizures--the problem seems to have gotten progressively worse.  I'm not sure if it's because the more government intervenes, the more people fear another banking collapse like the S&L crisis, or the bank collapses of the Great Depression, or if, like FoxNews's Radly Balko (and myself), people fear the government's sharp turn from capitalism to the failed socialist policies that stretched out the Depression and toppled the USSR.  After all, the current deficits the subprime lenders face is about equal to the national deficit.  If our government can't keep from overdrawing the bank account known as the taxpayer's dollars, how in the world is it going to be able to fix the banking problems with this bailout?

Laskin's last question, "Is it morally justifiable?" is, in my opinion, best answered by a resounding "no!"  No, it is not morally justifiable. This government has run up a several thousand dollar per person debt.  It is absolutely wrong to take even more taxpayer money to bail out debts that it forced on lenders by requiring them to make subprime loans in the name of "racial equality," or "social responsibility."  Forced redistribution of wealth--which is all this comes down to--is nothing better than the government reaching into the taxpayers' pockets and stealing their hard-earned money to give to those who don't make as much as they want to be making.  In this case, it's worse: the welfare is going to those who are making a lot of money.  Remember, the Kerrys had $2 million invested in AIG before it collapsed far enough that the government decided to intervene.  How is it right to take money from families making less than $40,000/year to give to investors?

So, what do we do?  There are suggestions.  Newt Gingrich's are good:

Four reform steps will have capital flowing with no government bureaucracy and no taxpayer burden. 

First, suspend the mark-to-market rule which is insanely driving companies to unnecessary bankruptcy. If short selling can be suspended on 799 stocks (an arbitrary number and a warning of the rule by bureaucrats which is coming under the Paulson plan), the mark-to-market rule can be suspended for six months and then replaced with a more accurate three year rolling average mark-to-market. 

Second, repeal Sarbanes-Oxley. It failed with Freddy Mac. It failed with Fannie Mae. It failed with Bear Stearns. It failed with Lehman Brothers. It failed with AIG. It is crippling our entrepreneurial economy. I spent three days this week in Silicon Valley. Everyone agreed Sarbanes-Oxley was crippling the economy. One firm told me they would bring more than 20 companies public in the next year if the law was repealed. Its Sarbanes-Oxley’s $3 million per startup annual accounting fee that is keeping these companies private. 

Third, match our competitors in China and Singapore by going to a zero capital gains tax. Private capital will flood into Wall Street with zero capital gains and it will come at no cost to the taxpayer. Even if you believe in a static analytical model in which lower capital gains taxes mean lower revenues for the Treasury, a zero capital gains tax costs much less than the Paulson plan. And if you believe in a historic model (as I do), a zero capital gains tax would lead to a dramatic increase in federal revenue through a larger, more competitive and more prosperous economy. 

Fourth, immediately pass an “all of the above” energy plan designed to bring home $500 billion of the $700 billion a year we are sending overseas. With that much energy income the American economy would boom and government revenues would grow.

However, since these possibilities reduce the size of government, and involve breaking up bureaucracies, I do not believe that they would ever have a snowball's chance in the tropics of being enacted, or carried out without being watered down to inefficacy if they were.

The National Review Online's Deroy Murdoc has simpler ideas that are even less likely to be enacted: Break up Fannie Mae and Freddie Mac, and sell off the pieces to investors.  Since both entities were initially government programs that were spun off, there's no way the government is going to break them up now.

So, what do we do now?  What can we do but brace for the government to forge ahead with the bailout and plunge us into a sinkhole that looks like it has the possibility of becoming worse than the Great Depression?

It is an election year, folks.  Both sides are trying anything they can think of to get their candidate elected.  That means that, despite what the American investors and taxpayers might prefer, ill-considered action will be taken.

Update: Go take a look and listen to Dave Ramsey's take.