Why the Antibailout Right Is Wrong

Plenty of economic conservatives have beaucoup problems with MOAB (the mother of all bailouts). Among the critics of the Paulson plan on the right: Michelle Malkin (a "naked power grab"), Bill Kristol ("a nightmare"), Michelle Malkin (a "disaster"), the Club for Growth ("cause more harm than good"), Michelle Malkin ("both parties...are about to screw us over"), Newt Gingrich ("slow down"), Michelle Malkin ("kill the bailout"), Rep. Mike Pence ("delay consideration"), Michelle Malkin (it's "time for ideological purity"), and Amity Shlaes ("recovery is possible without a bailout").

Also toss in about half of the folks posting over at the National Review's group blog, the Corner. And I am pretty sure Michelle Malkin has some reservations. In short, conservatives are standing athwart this trillion-dollar speeding locomotive and yelling, "Stop!" Or at least, "Slow down!" A few thoughts:

1) First, what to call these folks. The ABCs, Antibailout Conservatives? Or maybe the Liquidationists, in honor of Hoover Treasury Secretary Andrew Mellon, noted for saying the following as America plunged into the Great Depression:

Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.

Nope, "Liquidationists" sounds like a team of second-tier supervillains or perhaps a chain of superdiscount retailers. I shall warmly and affectionately nickname them the MellonHeads (with the "H" capitalized because this is the 21st century).

2) Note that few of the MellonHeads are actually saying, "Kill the bailout." Most want to make sure at least that any plan has strong oversight and transparency. In the end, they don't want to risk a total financial apocalypse. Shlaes, whose book The Forgotten Man is one of the best ever on the Great Depression, would take that risk, however. In a recent column, she points to the depression of 1920-21 that was sharp and relatively short and followed by the 1920s boom. One big difference between now and then is a lack of global and system financial crisis. Plus, unemployment increased from 1 percent to 11 percent back then. Anyone want to guess what the political fallout might be from a repeat of such a downturn?

3) In the abstract, are there better options out there? All kinds. I have no doubt the markets and economy would rally if we actually followed some of the suggestions of the MellonHeads: Index capital gains for inflation or put in a zero rate, reform entitlements, cut corporate taxes, move hard toward energy independence, and, the current favorite, temporarily abandon mark-to-market accounting. Certainly, such policies would make the bailout much less expensive. And on the day those reforms are enacted, I am going to be taking cash advances on my credit card and buying penny stocks on margin.

4) But here's the problem: The markets have always been counting on the idea of a Bernanke put or Paulson put to save the system in the end. That is why, I think, the stock market has held up so well all summer, not because investors thought cap gains might get indexed for inflation. Now, as Gordon Gekko put it, "perception has become reality." There is such fear and there is such a lack of confidence out there, anything other than Uncle Sam coming to the rescue would cause a financial panic and create a cataclysmic tipping point. Now is not the time to try and throw the hard six, folks.

5) Would the MellonHeads prefer the Stockholm solution, when Sweden took equity stakes in major banks during its credit crisis in the 1990s? (Japan did the same thing that decade.) Then you really are nationalizing Wall Street, though taxpayers might be protected more since they could better participate in the upside.

6) Are there risks to the Paulson plan? Oh, yes. Aghast at $800 billion-to-$900 billion budget deficits the next two years, the bond market vigilantes could send yields rising, further battering the economy. Or perhaps higher inflation expectation will send the dollar and bonds plunging and commodities like oil through the roof. There was certainly more than a whiff of that yesterday. But long-term inflation expectations, as measured by the Cleveland Fed, are still below 3 percent. And long-term entitlement liabilities add $2 trillion to $3 trillion every year to America's long-term indebtedness—and the markets don't even notice. With fewer fancy debt instruments floating around, there might be increased demand for treasuries.

7) Maybe it's smart positioning to be against the bailout. It's unpopular and, like the Iraq war, will most likely remain so even if it works. And I know conservatives dread having it lorded over them by liberals for the rest of their lives. As Pat Toomey of the Club for Growth put it: "Many politicians are using the current struggle to make free-market capitalism the scapegoat for the economy's troubles when in fact government played a major role in getting us into this mess."

But I don't think being for the bailout means you're either buying into the efficacy of big government or into the theory that the credit crisis is a free-market failure. Rather than risk a financial collapse, the MellonHeads might want to spend more time making the case how big government caused a mess only big government can fix and how we can avoid a repeat.