In Too Deep

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In Too Deep
Working away from a “stunningly irresponsible” bailout.

By David Freddoso

Conservative Republican members of the House of Representatives have offered a “free-market alternative” to Treasury Secretary Henry Paulson’s $700 billion plan to bail out the mortgage industry. Arizona’s John Shadegg talked to National Review Online about the state of negotiations Friday night.

**Is a bailout necessary to save the economy at this point from complete collapse — from a major failure of multiple institutions at the same time?

**I think that’s the most difficult question that could be posed under these circumstances, and it’s the question that I have struggled all week to find the answer to. I have talked to a lot of smart people who know Wall Street, know banking, know the economy quite well, and you hear different opinions. Some will tell you that it is absolutely essential. Quite frankly, I’m skeptical about that.

But I think that in some ways the question doesn’t matter any more. Because Secretary Paulson chose to raise the matter in the way he did — that is, to go public in a very high-profile way, not just with his concern, but with a kind of Chicken-Little, the-sky-is-falling kind of demand — it became a self-fulfilling prophecy.

That is to say, once the secretary of the Treasury announces to the world that there is a pending financial collapse, perhaps as great as the Great Depression, and Congress must act — he has sent a signal that essentially tells world markets that Congress must act. I will tell you that has been one of the most frustrating things about this since the very beginning…**
The proposal for an FDIC-style agency that is funded by Wall Street sufficient to solve the current crisis — is it necessary?

**I think it is a dramatically better vehicle than what Mr. Paulson proposed. And if he is absolutely convinced that is not sufficient, then it’s his job to step forward now and show that he has actually listened to the proposal and make the case for why it isn’t sufficient. Do I know if it’s necessary? … Now that Paulson has made the assertion that we are in deep trouble, he in fact has to send the signal that we are taking the potential of the serious troubles seriously… He has not done a very good job of making his case, he has not had people rallying to his side, saying he’s absolutely right… If you’re in the banking business now and you’re a lender, you’re going to say “Wow, Paulson says the government has got to get involved… I guess I’ll wait until I see what the government involvement is going to be.” And so there may have been some restriction in lending this week. And I’m inclined to believe that’s because Secretary Paulson said there’s a problem…

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