Accountability Wins... For Now

The $700 billion bailout (err.. "rescue plan") just failed to win approval in Congress, with substantial numbers of both Democrats and Republicans refusing to vote in favor.  Although it was revised from the first pass "blank check" bill so that some of the bailout loans could actually become profitable investments and resold at taxpayers' benefit, a bailout is still a bailout. 

An absolution of accountability, when accountability is needed.

Jack Welch (the turkey) added to our list of culprits in his latest Business Week column.

The list is long indeed: Congress, for overzealously pushing homeownership; the Fed, for keeping interest rates so low; predatory lenders, for taking advantage of unqualified and sometimes vulnerable home buyers; and home buyers, for getting in over their heads.

The list goes on: the White House, for letting banking regs become too loose; finance executives, for selling products they didn't understand while enjoying outsized profits; mark-to-market accounting, for accelerating the downturn; rating agencies, for mischaracterizing paper; and short-selling hedge funds, for betting on doomsday—thereby ushering it in.

Yes this will be painful, as the markets clearly told us after the vote.  But creating a perception that there's no accountability for poor leadership and even worse management will be even more painful in the long run.  Jeffrey Miron, an economist at Harvard and one of 166 academic economists who signed a letter to Congress opposing the bailout, has a similar opinion.

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.

As much as many people would like to blame big business, it was the government that pushed on the balloon, and it finally popped. He continues...

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.  Bankruptcy, not bailout is the right answer.

Indeed.  I may have to work a few more years to make up for the losses in my retirement account, but if that's what it takes to reset the risk-reward equation back to reality, then so be it.  However most likely there will be some compromise in Congress and some form of bailout will happen. 

And ten years from now we'll be scratching our heads once again wondering how we got into the latest mess.  And perhaps someone will point to the "protections for homeowners" and "protections for investors" and "protections for taxpayers" that will undoubtedly find their way into the compromise bill and get a glimmer of an understanding. 

Comments

[Ed]

Hear hear!!!

Great job, Kevin.

[Glenn McM]

My thoughts exactly. If the government hadn't tried to skew the risk-reward equation with more social engineering nonsense, this wouldn't have happened.

I pay my bills on time, read the fine print of my contracts, and understand what I can afford. If I take risks I know there could be a downside. If I buy a home, even one I can afford, I know I could lose it if I lose my job. That's life.

Somehow some people started to believe they deserved an "exemption from life." It's time to change that dangerous mentality.

[Tim Forrester]

I've been loving how the Democrats are now referring to the big bailout dollars as "the taxpayer's dollars". Where is this concept when they are looking at raising taxes? Then it is more like "the fee you pay to be an American" or some such nonsense. I agree however, the Republicans are equally at fault. This bailout idea is a mindblowing escapade into poor judgment.

[JJ]

Once again you have the guts to tell it like it is. That's why I read Evolving Excellence, even if I don't always agree with your occasional political slant. This time you hit it right on the money and it is obviously very relevant to lean business. Accountability, pure and simple. Leadership.

Give me pain now rather than pain in fifteen years, when I'm hopefully sitting on my boat in the south Pacific. If I still own a boat.

[Peter the Investor]

Some day, unless the government does even more to screw it up, value will return. There are some stocks, especially financial stocks, that are looking pretty tasty right now. Guts baby guts!

[Tanya]

Kevin! Your post just made the front page of Forbes.com under opinion! Congrats and great timing! No wonder it's getting the comments.

By the way, I completely agree.

[Dwayne]

Home run, Kevin! Yes, it will be painful, but LET'S GET IT RIGHT THIS TIME! Keep putting pressure on your representatives!

[Andy Wagner]

My fear is that the wrong folks are being held accountable. I don't hear anybody calling for congressmens heads. They started the whole thing by pushing for looser credit standards. Now it's going to be small businesses and regular folks, even people with sound credit, who can't get loans for *anything*.
Still, handing out money is never a good idea.

[Brandon]

I just worry about the implications of not going through with the bailout. Even though bankruptcy may be better in the long run, what will the country and world have to go through in the short and medium range. Many businesses use banks for short term debts such as payroll etc. If the banks go under and can't provide loans, then employees won't get paid, causing many problems that could be catastrophic. Or maybe if many of the large banks start going bankrupt other banks will in a short period of time. I definitely don't have all of the answers, but it seems more complicated then just saying let them go bankrupt.