By Jeffrey A. Miron


Economist Jeffrey Miron says the bailout plan presented to Congress was the wrong solution to the crisis

CAMBRIDGE, Massachusetts (CNN) -- Congress has balked at the Bush administration's proposed $700 billion bailout of Wall Street. Under this plan, the Treasury would have bought the "troubled assets" of financial institutions in an attempt to avoid economic meltdown.

This bailout was a terrible idea. Here's why.

The current mess would never have occurred in the absence of ill-conceived federal policies. The federal government chartered Fannie Mae in 1938 and Freddie Mac in 1970; these two mortgage lending institutions are at the center of the crisis. The government implicitly promised these institutions that it would make good on their debts, so Fannie and Freddie took on huge amounts of excessive risk.

Worse, beginning in 1977 and even more in the 1990s and the early part of this century, Congress pushed mortgage lenders and Fannie/Freddie to expand subprime lending. The industry was happy to oblige, given the implicit promise of federal backing, and subprime lending soared.

This subprime lending was more than a minor relaxation of existing credit guidelines. This lending was a wholesale abandonment of reasonable lending practices in which borrowers with poor credit characteristics got mortgages they were ill-equipped to handle.

Once housing prices declined and economic conditions worsened, defaults and delinquencies soared, leaving the industry holding large amounts of severely depreciated mortgage assets.

The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This "moral hazard" generates enormous distortions in an economy's allocation of its financial resources.

Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.

Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

Further, the current credit freeze is likely due to Wall Street's hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents.

The costs of the bailout, moreover, are almost certainly being understated. The administration's claim is that many mortgage assets are merely illiquid, not truly worthless, implying taxpayers will recoup much of their $700 billion.

If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.

The bailout has more problems. The final legislation will probably include numerous side conditions and special dealings that reward Washington lobbyists and their clients.

Anticipation of the bailout will engender strategic behavior by Wall Street institutions as they shuffle their assets and position their balance sheets to maximize their take. The bailout will open the door to further federal meddling in financial markets.

So what should the government do? Eliminate those policies that generated the current mess. This means, at a general level, abandoning the goal of home ownership independent of ability to pay. This means, in particular, getting rid of Fannie Mae and Freddie Mac, along with policies like the Community Reinvestment Act that pressure banks into subprime lending.

The right view of the financial mess is that an enormous fraction of subprime lending should never have occurred in the first place. Someone has to pay for that. That someone should not be, and does not need to be, the U.S. taxpayer.

Would the Last Honest Reporter Please Turn On the Lights?
By Orson Scott Card

Editor's note: Orson Scott Card is a Democrat and a newspaper columnist, and in this opinion piece he takes on both while lamenting the current state of journalism.

An open letter to the local daily paper — almost every local daily paper in America:

I remember reading All the President's Men and thinking: That's journalism. You do what it takes to get the truth and you lay it before the public, because the public has a right to know.

This housing crisis didn't come out of nowhere. It was not a vague emanation of the evil Bush administration.

It was a direct result of the political decision, back in the late 1990s, to loosen the rules of lending so that home loans would be more accessible to poor people. Fannie Mae and Freddie Mac were authorized to approve risky loans.

What is a risky loan? It's a loan that the recipient is likely not to be able to repay.

The goal of this rule change was to help the poor — which especially would help members of minority groups. But how does it help these people to give them a loan that they can't repay? They get into a house, yes, but when they can't make the payments, they lose the house — along with their credit rating.

They end up worse off than before.

This was completely foreseeable and in fact many people did foresee it. One political party, in Congress and in the executive branch, tried repeatedly to tighten up the rules. The other party blocked every such attempt and tried to loosen them.

Furthermore, Freddie Mac and Fannie Mae were making political contributions to the very members of Congress who were allowing them to make irresponsible loans. (Though why quasi-federal agencies were allowed to do so baffles me. It's as if the Pentagon were allowed to contribute to the political campaigns of Congressmen who support increasing their budget.)

Isn't there a story here? Doesn't journalism require that you who produce our daily paper tell the truth about who brought us to a position where the only way to keep confidence in our economy was a $700 billion bailout? Aren't you supposed to follow the money and see which politicians were benefiting personally from the deregulation of mortgage lending?

I have no doubt that if these facts had pointed to the Republican Party or to John McCain as the guilty parties, you would be treating it as a vast scandal. "Housing-gate," no doubt. Or "Fannie-gate."

Instead, it was Senator Christopher Dodd and Congressman Barney Frank, both Democrats, who denied that there were any problems, who refused Bush administration requests to set up a regulatory agency to watch over Fannie Mae and Freddie Mac, and who were still pushing for these agencies to go even further in promoting sub-prime mortgage loans almost up to the minute they failed.

As Thomas Sowell points out in a TownHall.com essay entitled "Do Facts Matter?" ( http://snipurl.com/457townhall_com] ): "Alan Greenspan warned them four years ago. So did the Chairman of the Council of Economic Advisers to the President. So did Bush's Secretary of the Treasury."

These are facts. This financial crisis was completely preventable. The party that blocked any attempt to prevent it was ... the Democratic Party. The party that tried to prevent it was ... the Republican Party.

Yet when Nancy Pelosi accused the Bush administration and Republican deregulation of causing the crisis, you in the press did not hold her to account for her lie. Instead, you criticized Republicans who took offense at this lie and refused to vote for the bailout!

What? It's not the liar, but the victims of the lie who are to blame?

Now let's follow the money ... right to the presidential candidate who is the number-two recipient of campaign contributions from Fannie Mae.

And after Freddie Raines, the CEO of Fannie Mae who made $90 million while running it into the ground, was fired for his incompetence, one presidential candidate's campaign actually consulted him for advice on housing.

If that presidential candidate had been John McCain, you would have called it a major scandal and we would be getting stories in your paper every day about how incompetent and corrupt he was.

But instead, that candidate was Barack Obama, and so you have buried this story, and when the McCain campaign dared to call Raines an "adviser" to the Obama campaign — because that campaign had sought his advice — you actually let Obama's people get away with accusing McCain of lying, merely because Raines wasn't listed as an official adviser to the Obama campaign.

You would never tolerate such weasely nit-picking from a Republican.

If you who produce our local daily paper actually had any principles, you would be pounding this story, because the prosperity of all Americans was put at risk by the foolish, short-sighted, politically selfish, and possibly corrupt actions of leading Democrats, including Obama.

If you who produce our local daily paper had any personal honor, you would find it unbearable to let the American people believe that somehow Republicans were to blame for this crisis.

There are precedents. Even though President Bush and his administration never said that Iraq sponsored or was linked to 9/11, you could not stand the fact that Americans had that misapprehension — so you pounded us with the fact that there was no such link. (Along the way, you created the false impression that Bush had lied to them and said that there was a connection.)

If you had any principles, then surely right now, when the American people are set to blame President Bush and John McCain for a crisis they tried to prevent, and are actually shifting to approve of Barack Obama because of a crisis he helped cause, you would be laboring at least as hard to correct that false impression.

Your job, as journalists, is to tell the truth. That's what you claim you do, when you accept people's money to buy or subscribe to your paper.

But right now, you are consenting to or actively promoting a big fat lie — that the housing crisis should somehow be blamed on Bush, McCain, and the Republicans. You have trained the American people to blame everything bad — even bad weather — on Bush, and they are responding as you have taught them to.

If you had any personal honor, each reporter and editor would be insisting on telling the truth — even if it hurts the election chances of your favorite candidate.

Because that's what honorable people do. Honest people tell the truth even when they don't like the probable consequences. That's what honesty means . That's how trust is earned.

Barack Obama is just another politician, and not a very wise one. He has revealed his ignorance and naivete time after time — and you have swept it under the rug, treated it as nothing.

Meanwhile, you have participated in the borking of Sarah Palin, reporting savage attacks on her for the pregnancy of her unmarried daughter — while you ignored the story of John Edwards's own adultery for many months.

So I ask you now: Do you have any standards at all? Do you even know what honesty means?

Is getting people to vote for Barack Obama so important that you will throw away everything that journalism is supposed to stand for?

You might want to remember the way the National Organization of Women threw away their integrity by supporting Bill Clinton despite his well-known pattern of sexual exploitation of powerless women. Who listens to NOW anymore? We know they stand for nothing; they have no principles.

That's where you are right now.

It's not too late. You know that if the situation were reversed, and the truth would damage McCain and help Obama, you would be moving heaven and earth to get the true story out there.

If you want to redeem your honor, you will swallow hard and make a list of all the stories you would print if it were McCain who had been getting money from Fannie Mae, McCain whose campaign had consulted with its discredited former CEO, McCain who had voted against tightening its lending practices.

Then you will print them, even though every one of those true stories will point the finger of blame at the reckless Democratic Party, which put our nation's prosperity at risk so they could feel good about helping the poor, and lay a fair share of the blame at Obama's door.

You will also tell the truth about John McCain: that he tried, as a Senator, to do what it took to prevent this crisis. You will tell the truth about President Bush: that his administration tried more than once to get Congress to regulate lending in a responsible way.

This was a Congress-caused crisis, beginning during the Clinton administration, with Democrats leading the way into the crisis and blocking every effort to get out of it in a timely fashion.

If you at our local daily newspaper continue to let Americans believe — and vote as if — President Bush and the Republicans caused the crisis, then you are joining in that lie.

If you do not tell the truth about the Democrats — including Barack Obama — and do so with the same energy you would use if the miscreants were Republicans — then you are not journalists by any standard.

You're just the public relations machine of the Democratic Party, and it's time you were all fired and real journalists brought in, so that we can actually have a news paper in our city.