Marketplace of Ideas Blog

I suspected that I wasn’t done writing about the bailouts.

The stock market isn’t done reacting to the bailouts, either, having lost 817.75 points Friday, 369.88 points Monday, and another 508 points Tuesday.

We’ve learned since Friday, however, that the U.S. isn’t the only country having financial problems and discussing financial bailouts. Much of the European Union has problems that are worse. The current list, according to the Wall Street Journal, includes Germany, the United Kingdom, Ireland, Iceland, the Low Countries (Belgium, the Netherlands and Luxembourg) and Italy, showing up in unusual places.

As Investors Business Daily puts it:

Like it or not, our financial authorities have acted, cobbling together a $700 billion bank rescue at the Treasury and $1.2 trillion in short-term loans from the Fed. And Fed chief Ben Bernanke said on Tuesday that interest rates will be cut again if necessary.

By contrast, Europe has chosen a series of ad hoc responses but no coherent strategy. On Wednesday, for instance, Britain is expected to unveil its own bank bailout. That follows loan packages and bailouts crafted by Germany, Denmark, France and Italy for their troubled banks and consumer loan businesses.

President Bush is calling for finance ministers from the G7 nations — the U.S., Canada, Britain, France, Italy, Germany and Japan — to meet Friday to discuss heading off a world recession.

It's a good idea. But comments like those heard from Europe about the "end to cowboy capitalism" or the need for a "new era" of regulation are neither helpful nor smart. Maybe the Europeans will show up with some ideas for a change, and leave the snarky anti-capitalist, anti-American rhetoric at home.

But don't bet on it.

As for this country, if you want to find a scapegoat for where this all started, go to Boston, as the Boston Herald reports (and as noted by the Wall Street Journal’s Best of the Web Today):

Among the recommendations in the Boston Fed’s 1993 “Closing the Gap: A Guide to Equal Opportunity Lending”:

Special consideration could be given to applicants with relatively high obligation ratios who have demonstrated an ability to cover high housing expenses in the past. Many lower-income households are accustomed to allocating a large percentage of their income toward rent.

Accumulating enough savings to cover the various costs associated with a mortgage loan is often a significant barrier to homeownership by lower-income applicants. Lenders may wish to allow gifts, grants, or loans from relatives, nonprofit organizations or municipal agencies to cover part of these costs.

Lack of credit history should not be seen as a negative factor. Certain cultures encourage people to pay as you go and avoid debt.

Lenders should focus on the applicant’s ability to maintain or increase his or her income level, and not solely on the length of stay in a particular job.

In addition to primary employment income, Fannie Mae and Freddie Mac will accept the following as valid income sources: overtime and part-time work, second jobs (including seasonal work), retirement and Social Security income, alimony, child support, Veterans Administration (VA) benefits, welfare payments and unemployment benefits.

Nobel Prize-winning economist Gary Becker points out the several reasons why what’s going on now is not as bad as the Great Depression:

Although it is the most severe financial crisis since the Great Depression of the 1930s, it is a far smaller crisis, especially in terms of the effects on output and employment. The United States had about 25% unemployment during most of the decade from 1931 until 1941, and sharp falls in GDP. Other countries experienced economic difficulties of a similar magnitude. So far, American GDP has not yet fallen, and unemployment has reached only a little over 6%. Both figures are likely to get quite a bit worse, but they will nowhere approach those of the 1930s.

Becker also points out that the $700 billion price tag of the bailouts is the worst-case scenario, and that, as apparently happened after the savings & loan bailout of the 1980s, the government may actually break even or make money once the bad assets are auctioned off.

Is this a final “Crisis of Global Capitalism” — to borrow the title of a book by George Soros written shortly after the Asian financial crisis of 1997–98? The crisis that kills capitalism has been said to happen during every major recession and financial crisis ever since Karl Marx prophesized the collapse of capitalism in the middle of the 19th century. Although I admit to having greatly underestimated the severity of the current crisis, I am confident that sizable world economic growth will resume before very long under a mainly capitalist world economy.

Consider, for example, that in the decade after various predictions of the collapse of global capitalism following the Asian crisis, both world GDP and world trade experienced unprecedented growth thanks to the power of market competition on a global scale. The South Korean economy, for example, was pummeled during that crisis, but has had significant economic growth since. World economic growth will recover once we are over the present severe financial difficulties.

On the other hand, Investors Business Daily wonders if history is repeating itself, but not in the ways you might think, and with consequences far worse than just our finances.