Clinton's Treasury Secretary: Thumbs Down on the Dodd Bank Bailout

In today's Washington Post , Bill Clinton's Treasury Secretary, Lawrence Summers, sounded as if he had joined the Heritage Foundation in expressing profound skepticism that the Chris Dodd Mortgage Bailout Bill will not implode at stupendous cost to the taxpayer.

While adopting the Bush adminstration posture that the crisis at Fannie and Freddie made even a wretched bill better than inaction, Lawrence Summers offered zero grounds to believe that we will not be back doing this all over again real soon. 

Unfinished Business at Freddie and Fannie

What the Government Should Do if the Housing Giants Can't Stand on Their Own

Anyone who cares about the health of the U.S. economy should welcome the enactment of the Treasury's rescue plan for Fannie Mae and Freddie Mac, along with other measures to support the housing market. While there is room for argument about details, the risks to the financial system were too great to allow delay. .......

No one should suppose, however, that the issue is satisfactorily resolved, even for the short term. Emergency legislation was necessary because market participants were unwilling to buy Fannie and Freddie's debt; investors doubted that the government-sponsored enterprises, or GSEs, were healthy enough to repay it and did not draw sufficient reassurance from the implicit guarantee of federal support. If their debt proves easier to place now, it is only because this guarantee has been strengthened, not because anything has changed at the GSEs.

This, to put it mildly, is a highly problematic posture for policy. While I strongly supported the Federal Reserve's policy response to the crisis at Bear Stearns, because it was necessary to avoid systemic risk, it is easy to sympathize with those who fear that bailouts inhibit market discipline. Consider how much more problematic the Bear Stearns response would have been had policymakers signaled their commitment to back the company's liabilities without limit; left management in place with no change in the business model; and allowed dividends to be paid and shareholders to keep going with hope for a better tomorrow. Yet all these elements are present in the cases of Fannie and Freddie.

To see the temptation and danger inherent in such a situation, one need only look back to the mismanagement of the savings-and-loan crisis.... http://www.washingtonpost.com/wp-dyn/content/article/2008/07/27/AR2008072701167.html

 

One of the arguments against term limits is that more experienced officeholders will learn from their mistakes. Throw that argument out. Since Chris Dodd and co. are eager to re-enact the 1989-90 Savings & Loan debacle, while adding another zero to the ultimate price tag, we can garner that one learns nothing from service on the Senate Banking Committee besides how to invite financiers to fundraisers.