Sirota's Orwellian bailout analysis

One of what I considered to be the most important arguments against the “financial system stabilization” bill is that it would let people who either don’t understand economics or hate capitalism, such as American “progressives” or socialist dictators elsewhere claim that free markets have failed in the United States, which is, of course, an outright lie.

But leave it to David Sirota to prove that argument right within hours of the bill’s passage.

Sirota’s note of October 3, called “Bailout is capitalism murdering democracy” is a remarkable work of Orwellian progressive-speak.  Black is white, war is peace, and the corruption of Fannie Mae through Democratic congressional regulation (and their blocking of oversight regulation) somehow represents failure of a free market.

The idea that this bill is rescuing a fundamentally capitalist system is a joke. The idea that the bill itself represents capitalism is a dangerous joke.  And the idea that the bill is murdering democracy turns history on its head.  Instead, democracy, in the form of Americans with no understanding of economics or others like unions whose interests are in destroying capitalism voting for people like Barney Frank, Chris Dodd, and most of the current Democratic leadership, have murdered capitalism, or at least severely wounded it.

Sirota’s attempts to conflate what’s going on here with what happens in China, a system he calls “authoritarian capitalism” actually insults China, economically speaking. The Chinese are only baby steps away from being a brutal communist dictatorship. Still, they realize that they need free markets (which they interfere in enough to make sure the Communist Party keeps all political power.) The fact that anyone could compare the US to the PRC without being laughed out of the room is quite damning for what the US has become in recent years…mostly due to people who think like Sirota. Better examples of authoritarian capitalism are Singapore and now Hong Kong (since the British ceded it to the Chinese.)  These are substantially authoritarian places politically, but especially in Singapore and Hong Kong, their economic systems are freer than ours.  

Sirota proves that he doesn’t understand America when he says that we have a “reliance on institutions rather than individuals.” That might be true only in the area of politics, where we revolted against a king to produce a republic with a relatively stable system of government with the well-known “checks and balances.” Still, it is only a liberal who would say that we as a nation have a reliance on institutions, in part because that’s what liberals themselves do and in part because they want that statement to be true because they believe (correctly) that reliance on institutions helps Democrats gain power.

Sirota argues that the bailout bill demonstrates that we’re moving to reliance on an individual (the Treasury Secretary) much as one man was given substantial control over Iraq just after the overthrow of Saddam.  But he is completely wrong…again.

Yes, the Treasury Secretary will have a lot (too much) power under this bill.  But that’s not why Congress supported it, and I would bet money that most Americans don’t realize the power it gives Paulson and successors.  They probably think some amorphous combination of the Fed, the Treasury, and Congress will be handling the financial aspects of the bailout bill. And they’re substantially correct because nothing this big will get done without tremendous consultation. And then the Feds will have to use outside firms to actually manage the process.

So this bill does not represent a move by the American people toward authoritarian capitalism. It does, however, represent a move by Congress to massively and semi-permanently increase the role of government in our financial system.

What an ironic turn of events, given that the problems we’re facing now were not caused by any of the bogeymen claimed by Democrats: This mess was not caused by deregulation, a lack of oversight due to the Bush Administration, tax cuts, or even “Wall Street greed”.  No, it was caused by the Democrats turning Fannie Mae and Freddie Mac into the enforcement arm of their “affordable housing” scheme…a scheme meant to buy them votes in perpetuity because low income people would always have to thank the Democrats for their being able to own a home.  Fannie and Freddie in turn forced banks to make loans, under threat of certain decertifications and under threat of being called “racist” if they didn’t make loans to minorities, no matter how unqualified they were for the loan.  This was anything but a free market.  It was socialism. 

Be very clear: The government tells banks to issue loans to people who don't qualify, and the government guarantees those loans.  Socialism, period.

Adding to the problem were two huge factors:  First, the implicit government guarantee of Fannie and Freddie. Second, the AAA ratings given to mortgage securities by Standard & Poors and other ratings agencies, although even those firms must be given a little break on guilt because they too were relying on the government guarantee.  If you believe that a Federal Government guarantee is worth anything, then it’s pretty hard to blame investors, “Wall Street” or anybody else for trading and investing in mortgage securities as if the underlying assets were rock-solid.  When you buy a new car and the engine fails during your warranty period, do you go into the dealership’s service department wondering whether they might arbitrarily say “sorry, we’re not going to honor your warranty”? Of course not. The quality of the warranty could actually have one of your major factors in deciding to buy that particular brand of vehicle. And so it was with mortgage securities.

Of course, there were some serious mistakes made by Wall Street, including using excessive leverage to try to keep up with other firms. Firm A would start using some leverage, then would show some level of returns on capital, and Firm B would then feel pressure from its underperforming stock price to lever-up-to-catch-up.  Still, you have to give them a little break on calling them stupid or reckless because they were relying on the equivalent of the new car warranty.

It should also be pointed out that the actual bad mortgages were almost never made by Wall Street banks.  They were made by small or medium-sized local banks, or by mortgage companies like CountryWide (home of the sweetheart mortgage for Democratic politicians).  Mortgage securities eventually made their way to Wall Street and into mutual funds, hedge funds, and every other sort of investment vehicle.  But where else should securities be traded other than Wall Street?  Wall Street was as much the victim here as the villain.  But you never hear that on TV.

All you here is the outrageous lies of Democrats that this was the fault of deregulation. That is simply a lie. It was the fault of specific regulation put through by Democrats.  They say it was the fault of a lack of oversight and they blame that on President Bush. That’s outrageous, too, as the Administration and legislators tried multiple times to bring stricter oversight to Fannie and Freddie, only to be blocked by Congressional Democrats who were reaping large campaign contributions from the GSEs.  You hear that the bailout is handing money to speculators. If that were the case, the bailout wouldn’t be happening. Instead, the bailout represents the mistaken belief that everything will just be OK if government keeps people in home ownership who should be renting and that the market can’t sort itself out, even if with some pain, if just left alone. Of course, while Sirota decries the bill, that attack on free markets is exactly what he wants you to believe is true. 

Fannie and Freddie were the homes of two of the biggest accounting frauds this nation has seen, Enron-like in scale, mostly under the leadership of prominent Democrats.  Franklin Raines, friend of Clinton and Obama, should be in prison right now after presiding over much of that fraud and leading Fannie into the biggest fine ever issued by the SEC. Instead, he was offered a sweetheart deal to get out of charges, including having insurance pay almost all of his $30MM settlement.

Sirota and I actually agree that the President has acquired too much power in recent years and that Congress has been complicit in that power grab.  However, I don’t think this is as much a “national religion” as it is a lack of confidence in Congress as well as a fairly typical reaction of people throughout history during war time.

But then he reverts to claiming that the bill represents capitalism crushing democracy. The last thing any real capitalist wants was this bill.  The last thing any real capitalist wants is the centralization of economic power in the hands of one man, one organization, or the government.

There’s a reason the presidential candidate for the American Socialist Party was on TV this weekend “embracing” the bailout as “a first step toward nationalizing our financial system.”

Sirota does have one important thing right: The bailout bill is horrible. It’s exceptionally dangerous for our future. But his claim that the bill represents capitalism murdering democracy is, as I said before, Orwellian double-speak, as Sirota tries again to blame capitalism for the failures of big government and the devastating impacts of social engineering.  

If you want to find a place for blame for the current mess, look directly at people like David Sirota and the politicians whom he and other progressives support. They hate free markets, hate capitalism, hate people earning profits, and they’ve convinced you to hate those things too, so you’ve voted for Democrats and now we’re reaping the whirlwind.

That said, I must add that what we’re going through is an incredible indictment of the Republicans’ destruction of their brand through corruption, over-spending, and incompetence for the first part of this decade. The likelihood of a President Obama and even greater Democratic control over congress says far more about the horrible state of the GOP than anything good about the Democrats.

I fear greatly for the country over the next several years. It will be like the Jimmy Carter years all over again.  The only good news is that it took a Jimmy Carter to allow for Ronald Reagan.

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