2008, Year Of The Bailout
By: Timothy P. Carney
Examiner Columnist
January 2, 2009
Not too long ago, in fact, at the beginning of 2008, the U.S. had a reputation as a free-market economy in which businesses rose and fell of their own strengths or flaws and to their own profit or loss. But 2008 changed all that. Too be more precise, the administration of President George W. Bush changed all that in 2008.
Americans used to get exorcised any time the federal government considered bailing out private interests. When Chrysler got a $1.5 billion loan in 1979 (about $4.25 billion in today’s dollars), there was an outcry. When the Clinton administration bailed out Wall Street bankers in 1994 with a bailout of the Mexican peso, it was scandalous.
But as 2008 wound down, we got bailouts so large and in such rapid succession that we never had time to catch our breath.
In the last days 2007, the Bush Administration became worried about the fact that banks, shaken by the burgeoning crisis in subprime mortgages, were showing increased aversion to risk—they weren’t extending medium-term or long-term loans to other banks.
So the Federal Reserve launched the “Term Auction Facility,” a special new program lending money to banks because private banks wouldn’t. Every two weeks, the Fed leant out new money to banks, and currently about $450 billion is outstanding.
Along the same lines, in March, the Fed opened this same lending window to Wall Street, launching the “Term Securities Lending Facility,” which has loaned out about $182 billion in an effort to keep investment banks like Lehman Brothers and Bear Stearns from going under.
Where did the Fed get all this money? Basically, they created it out of thin air. Among other things, this inflation dilutes the value of your dollar, thus making your salary and your savings less valuable. It’s a backdoor tax, taking money from you.
But Washington was just getting warmed up. Within days, the federal government—again, with no congressional approval—extended a $30 billion loan to help JP Morgan buy up failing Bear Stearns. At the time, this was incredible. Was Washington really using taxpayer money to prop up failing investment banks? What happened to the whole idea of a profit-and-loss system?
National Review Online writer David Freddoso called it “The mother of all government bailouts.” Oh, we were so innocent back then.
Most folks these days forget the massive mortgage lender bailout this past summer, which put taxpayers on the hook for lender defaults, to the relief of those Wall Street firms who had invested in bum mortgages, especially Bank of America, which was buying up subprime champion Countrywide while writing the housing bailout bill.
This was quickly followed by the least surprising bailout in American history. Fannie Mae and Freddie Mac - the government-sponsored enterprises that fueled the housing boom while funding political campaigns and profiting from an implied subsidy - got the bailout everyone knew was coming. The government more or less nationalized the mortgage underwriters, thus putting the home-lending industry basically under federal control.
Shortly thereafter, private insurer AIG got $80 billion in taxpayer money to try and cut its losses in selling credit-default swaps and to protect the firms it was insuring, such as Goldman Sachs. That wasn’t enough, and so in the winter, the feds piled on some more AIG cash. Somewhere in there, carmakers got more than $20 billion.
Then came the true mother of all bailouts (for now), dubbed the Troubled Assets Relief Program (TARP). The idea was to spend $700 billion buying up mortgage-backed securities in order to prevent Wall Street from freezing up.
Those of us who opposed this plan were derided as reckless ideologues who were going to spur another Great Depression. Well, it turns out that even the Bush Administration eventually agreed this wasn’t a great plan, and Treasury Secretary Henry Paulson shifted gears and, yet again without Congressional approval, spent TARP funds in a completely different way—still bailing out big business, but through other mechanisms.
Of course, after Congress rejected a bailout of U.S. automakers last month, the Bush administration just did it themselves.
Different analysts place different price tags on the 2008 cornucopia of bailouts, all in the trillions. But the real costs are not limited to money authorized and spent last year.
The true costs are the astounding creation of moral hazard (why not be risky if government will just bail you out?), the unprecedented expansion of federal power, and the blatant shredding of the Constitution’s separation of powers between the executive and legislative branches.
The Bush bailouts were horrible, but what will future presidents do with this power? Today, many Americans are glad 2008 is over. Soon, we’ll wish it never happened.
Examiner columnist Timothy P. Carney is editor of the Evans-Novak Political Report. His Examiner column appears on Fridays.
More from Timothy P. Carney
- Timothy P. Carney: McDonnell should let the market, not developers, guide transportation policy
- Abortion, 'moderates,' and the Dougherty Doctrine on the morning after
- Obama's revolving door always open to Podestas
- Abortion, spiritual conversions, and stimulus money
- Isn't this Standard Operating Procedure for subsidy suckling companies?
