Commentary by Caroline Baum
July 18 (Bloomberg) -- ``When I picked up my newspaper yesterday, I thought I woke up in France,'' said Senator Jim Bunning, Republican from Kentucky, who in a former life threw curve balls from the mound as a professional baseball player.
Bunning was conveying his reaction to learning that the U.S. Treasury extended a lifeline to Fannie Mae and Freddie Mac Sunday evening, before Asian markets opened.
``It turns out socialism is alive and well in America,'' Bunning said in his opening statement at a July 15 Senate Banking Committee hearing.
He has a point. The Banking Committee was gathered to hear testimony from Federal Reserve Chairman Ben Bernanke on the state of the economy (not good) and, immediately following, more testimony from Bernanke, Treasury Secretary Hank Paulson and Securities and Exchange Committee Chairman Chris Cox on the latest developments in financial markets (also not good) and regulators' latest initiatives to make them better.
Cox told the committee he was launching a jihad against rumor-mongers and short-sellers. The SEC subpoenaed internal communications from Wall Street firms and hedge funds to determine if there was any hanky-panky going on in connection with the dive in the share prices of Bear Stearns Cos. earlier this year and Lehman Brothers Holdings Inc.
The securities industry regulator introduced new requirements for anyone looking to sell short the stock of 19 financial companies. The new measures will expire in 30 days if not extended. (Everyone who thinks they won't be extended, raise your hand. Good. We can move on.)
Shoot the Speculators
Cox's initiative followed, by a few weeks, a series of congressional investigations into evil oil speculators, whose machinations were said to be responsible for the 50 percent increase in crude oil prices this year.
``Congress wanted to go after the oil companies,'' says Gerry O'Driscoll, senior fellow at the libertarian Cato Institute in Washington. ``But they found that the public wanted them to pump more oil.''
No wonder Bunning thought he was in France. The U.S. is supposed to be a beacon of capitalism for the rest of the world. Our leaders preach the merits of free markets to developing countries looking to emerge from poverty. They look askance when foreign monetary authorities, such as Hong Kong and Taiwan, intervene to support their domestic equity markets. Government ownership of private companies, Asian ``crony capitalism'' and European-style corporatism, with business and state interests aligned, are frowned upon.
Case-by-Case Capitalism
``We want free-market mechanisms as long as everything is doing fine,'' says Jim Glassman, senior U.S. economist at JPMorgan Chase & Co. ``In times of crisis, we want to keep market mechanisms in check. If shorting a company is a bad idea, reality will prove it wrong.''
A week ago, with the shares of Fannie and Freddie trading in single digits, down as much as 80 percent since the start of the year, the U.S. government proposed emergency measures to rescue the two government-sponsored enterprises, which own or guarantee $5.2 trillion of the $12 trillion of mortgages in the U.S.
The GSEs gained access to the Fed's discount window (always room for two more). They got bigger, albeit unspecified, lines of credit from the Treasury, a source of contention with Banking Committee Chairman Christopher Dodd, who wants something in return for the ``blank check.'' And if the going gets really tough, Treasury can buy stock in the two companies.
Epistles are already being written about the death of capitalism. Liberals are saying I-told-you-so, brandishing examples of market failure.
More Regulation
How do we know the market failed if we don't allow it to work? Capitalism without failure is like religion without sin.
The U.S. has spent the last 30 years dismantling some of the onerous regulations enacted during the Great Depression. Entire industries have been deregulated. The Glass-Steagall Act separating commercial and investment banking was repealed. Where rules still existed, financial innovation -- the Eurodollar and Eurobond markets -- found a way around them.
It's a foregone conclusion that the country is headed back in the other direction. The only question is how far. The Nasdaq bubble gave us Sarbanes-Oxley. Now that the housing collapse has devastated construction and finance industries, government can take up some of the slack. (Who better to staff new regulatory agencies than out-of-work Wall Street types, who know the ins and outs of the rules?)
The Foreclosure Prevention Act of 2008, which is now in a House-Senate conference committee, establishes ``a new independent regulator'' for the GSEs that would set capital standards and beef up risk management.
Conflict of Interest
What if said regulator finds the GSEs inadequately capitalized? One alternative would be to shrink their huge balance sheets.
But wait! Congress needs Fannie and Freddie to gobble up all the mortgages banks are willing to make to prevent a complete implosion in the housing market. (That new regulator is being unnecessarily tough on poor Fan and Fred.)
Maybe Treasury should start a taxpayer-funded sovereign wealth fund and buy all the bad loans -- even foreclosed homes -- no one wants. In retrospect, the Resolution Trust Corp., created in 1989 to dispose of savings and loans' bad assets, looks like a model of efficiency compared with some of the proposals being bandied about today.
And no, none of them are solutions for a market failure. You can't whine about the death of capitalism when government is putting a gun to its head.
(Caroline Baum, author of ``Just What I Said,'' is a Bloomberg News columnist. The opinions expressed are her own.)
To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net.
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