FedSoc LiveBlog: Showcase Panel: Bailouts and the Government as Insurer of Last Resort

November 13th, 2009

Showcase Panel II: Bailouts and the Government as Insurer of Last Resort
Friday, Nov. 13
10:15 a.m. – 12:00 noon
Grand Ballroom

Hon. C. Boyden Gray, Gray & Schmitz LLP and Former U.S. Ambassador to the European Union
Mr. Maurice R. Greenberg, Chairman and Chief Executive Officer, C.V. Starr & Co., Inc.
Dr. Robert D. McTeer, Distinguished Fellow, National Center for Policy Analysis
Hon. Steven Wallman, Chief Executive Officer, Foliofn
– Moderator: Hon. Janice Rogers Brown, U.S. Court of Appeals, D.C. Circuit



Government inviting rent seeking to extort the government leads to need for bailout. Adam Smith supports this. Adam Smith originally a moralist, not an economist.

If you were a homeowner, would you sell a mortgage to someone you knew couldn’t pay you back?  No, not deliberately, unless govt. told you to with an offer to insure you.


The govt. then allowed the loans to be packaged into products and gave them good ratings and sold to more unsuspecting people.  The govt. promised to make the money available and pick you up if you default.


Adam Smith would not tolerate this.  Some say he didn’t understand human nature so we have to surround his views with a better sensitivity and how to control greed.


I would argue that this turns AS on his head, b/c he saw a community sense of people and individuals, but govt. will interrupt this.


AS’s first book was on morals, not economics.  His idea, or building block, was the ability for man to be part of a community.  It was seen as a gloss on the golden rule.  He did not tolerate businessmen: “No two businessmen could ever get together without some capture of public interest or plan to raise prices.”


Looking at recent history, maybe he knew something…  He would have opposed bailouts


I was at Munich meeting of UN Security Conference and was told that no two economists could ever agree on what caused Great Depression so it would be a waste to look for causes of the recent crisis.  So I asked if we are then writing thousands of pages of legislation to fix something we cant’ identify?


We will not break up the big banks, while Europe did so.


We need to figure out what we’re doing before we try to fix a regulatory structure that likes bailouts and perpetuates moral hazard.


(on the phone)

Discussing AIG bailout.

As many people know, AIG raised questions we don’t have answers too, and there needs to be such answers to set the record straight.


Not bailing out AIG bailout would have shown that you have the right to succeed and fail. Failure would be Ch. 11 and then back to business.


The case for bailouts is usually systemic risk, and the case against it is that saving management and owners from consequences of bad decisions creates moral hazard.  In most so-called bailouts of 2008, top decision makers were not saved, they lost their jobs and their wealth.  It wasn’t “heads I win tails you lose.”


Many who were saying of Lehman Bros. “let them fail,” later saw Lehman failure as the worst part of the crisis.


I’m not sure system could survive many more failures like this, which cost me about 30% of my “little” portfolio.


Under the circumstances, it worked well for 600 banks who held Mortgage backed assets.  Congress has used this as a pretext to expand government power under the worst populist sentiments. The public regards TARP as the govt. spending their money to support evil doers.


The Fed’s extraordinary lending last year is more likely to earn a net profit for taxpayers.  Skeptics take for granted that federal money will be highly complacent, but I doubt it.


Banks are scared of debt so they are holding the excess of the govt. money.

During Depression, reserve requirements for bank was increased, so banks contracted credit first.  Turned out that excess reserves were not considered excess by the banks. They wanted extra cushion against uncertainty.  Today’s banks are holding the excess reserves voluntarily, for the exact same reason.  Stimulus problem is like hunting wild hog with a shotgun, too diffuse, not focused.  It was old fashioned spending, “money spent money gone.”


Debt is head from 40% GDP to about twice that in a few years.  Raising taxes on weak economy is a danger that helped exacerbate the Depression. We are on a slipper slope to Smoot-Hawley, see Mexican trucks.


So how do we regulate?  The question has always been regulation or not, but how to get good regulation.  We must ask, if we are going to have regulation and market failure, how it can be done best.


The idea of millions of homeowners all buying into the same idea at the same time and being given the same credit terms looked like genius at the time by the banks, but what you end up with is “too big to fail” made up of millions of homeowners.  It is not simply an issue of large amounts of company stock.  We need to rethink regulatory apparatus in this light.


Some current ideas are interesting:  many people dislike them, mostly bankers.


Lots of homeowners signed up for things they didn’t understand.  They also didn’t realize that no one was looking out to make sure their home was available for assistance.


We can learn from this about how systemic risk is generated:  If you can stop homeowners at the time from getting sub-primes you can eliminate part of the cause that creates too big to fail.  Interconnectedness must be evaluated


We are not there yet, we need to study evolution and common law.