Washington’s Blog 
Tuesday, Oct 13th, 2009
Government leaders said that massive bailouts were necessary. Were they right?
The New York Times wrote  on July 16th:
In retrospect, Congress felt bullied by Mr. Paulson last year. Many of them fervently believed they should not prop up the banks that had led us to this crisis — yet they were pushed by Mr. Paulson and Mr. Bernanke into passing the $700 billion TARP, which was then used to bail out those very banks.
In his latest trend forecast, Gerald Celente writes:
It was the familiar fear tactic — one that had worked in the past and would work again — an economic version of the Bush/Cheney argument for the Iraq War. The people were told that Saddam Hussein had weapons of mass destruction and ties to Al Qaeda. If he wasn’t stopped, the next cloud would be a mushroom cloud.
The pretense was different but the game was the same: instill fear in a panicked public and they will follow their leader, regardless of how shallow the reasoning or how big the lie.
Just as the nation was hurried to war before it could be proven that Saddam Hussein had no weapons of mass destruction or Al Qaeda ties, so too there was no time to debate what might happen if the “too big to fail” failed…
While the national pastime of “follow the leader” is always the path of least resistance, it comes at a high cost … financial ruin and/or war and death. In either case, when disaster strikes, the followers typically absolve themselves of any direct moral responsibility for both the outcome and for the role they played in allowing it to happen.
Celente is over-the-top, right? Tin foil hat time, right?
Well, maybe. But Congressmen Brad Sherman and Paul Kanjorski and Senator James Inhofe all say that the government warned of martial law if Tarp wasn’t passed:
Bait And Switch
Indeed, the Tarp Inspector General has said  that Paulson misrepresented some fundamental aspects of Tarp.
And Paulson himself has said :
During the two weeks that Congress considered the [Tarp] legislation, market conditions worsened considerably. It was clear to me by the time the bill was signed on October 3rd that we needed to act quickly and forcefully, and that purchasing troubled assets—our initial focus—would take time to implement and would not be sufficient given the severity of the problem. In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks.
So Paulson knew “by the time the bill was signed” that it wouldn’t be used for its advertised purpose – disposing of toxic assets – and would instead be used to give money directly to the big banks? But he didn’t tell Congress before they voted to approve the Tarp legislation? Does that mean that Paulson either actively misrepresented the purpose of the legislation or else committed a lie by omission – holding his tongue even though the fundamental idea behind his bill had changed?
It was a bait-and-switch, whether or not it was an intentional one.
The House Next Door
And while I have never heard of Obama and Bernanke’s “house next door” speeches before, Celente does a good job of describing them and then pulling the rug out from under their rationale:
Asked why taxpayers should be forced to foot the bill to bail out banks, brokerages, insurance companies and other institutions that had made bad bets, Mr. Obama responded, “You know, if my neighbor’s house is on fire, even if they were smoking
in the bedroom or leaving the stove on, right now my main incentive is to put out that fire so that it doesn’t spread to my house.”
When asked the same question seven months later, Ben Bernanke resorted to the same illegitimate analogy: “If you have a neighbor, who smokes in bed. And he’s a risk to everybody. If suppose he sets fire to his house, and you might say to yourself, ‘I’m not gonna call the fire department. Let his house burn down. It’s fine with me.’ But what if your house is made of wood? And it’s right next door to his house? What if the whole town is made of wood? Well, I think we’d all agree that the right thing to do is put out that fire first, and then say, ‘What punishment
is appropriate? How should we change the fire code? What needs to be done to make sure this doesn’t happen in the future? How can we fire proof our houses?’ That’s where we are now. We have a fire going on.”
Comparing a neighbor’s house on fire to spending trillions to bail out failed financial institutions is a totally fraudulent, puerile and transparent analogy … one that happened to be accepted without question by the entire media and foisted upon the public as the logic of the wise.
“Smoking in bed” and “the house on fire” bore no relationship to the reality. More to the point, what if your neighbor is a compulsive gambler who lost his fortune in Vegas and is now losing his house? Should the “whole town” be taxed for generations to come so that your neighbor is able to retain possession of his McMansion? And for his gross failures, should he be further rewarded with millions in “executive compensation” so he can travel first class back to Vegas to continue his wasteful, profligate ways?
Preventing the Next Fire
The bottom line is this. If the fire at the neighbor’s house was threatening your house, wouldn’t you want his matches taken away? Especially if he had lit fires that had burned down other houses in the past ?
Unfortunately, as I have previously pointed out , Obama’s proposed economic regulations are like a law which makes arson illegal, but exempts convicted arsonists.
The top independent economists warn that the economy will not stabilize – and hundreds of billions or trillions of additional dollars will need to be thrown at the giant banks and financial companies – unless the fundamental problems are actually addressed and fixed. They agree that – to date – Obama, Summers, Geithner, Bernanke and the rest of the boys have not done so.
Indeed, I would argue that the government is actually handing out matches by encouraging the financial giants to hide the extent of their toxic assets (through funny accounting and the continued use of SIVs), restart the shadow banking system, re-lever up, and engage in new types of financial schemes such as securitization of life insurance policies .
As I wrote  a year ago, by trying to put out the raging fires of deleveraging, the government was ensuring that they would grow and wipe out the whole forest.
And as former head BIS economist William White  wrote recently, we have to resist the temptation to blow another bubble every time the economy gets in trouble :
Forest fires are judged to be nasty, especially when one’s own house or life is threatened, or when grave harm is being done to tourist attractions. The popular conviction that fires are an unqualified evil reached its zenith after a third of Yellowstone Park in the US was destroyed by fire in 1988. Nevertheless, conventional wisdom among forest managers remains that it is best to let natural forest fires burn themselves out, unless particularly dangerous conditions apply. Burning appears to be part of a natural process of forest rejuvenation. Moreover, intermittent fires burn away the undergrowth that might accumulate and make any eventual fire uncontrollable.
Perhaps modern macroeconomists could learn from the forest managers. For decades, successive economic downturns and even threats of downturns (“pre-emptive easing”) have been met with massive monetary and often fiscal stimuli…
Just as good forest management implies cutting away underbrush and selective tree-felling, we need to resist the credit-driven expansions that fuel asset bubbles and unsustainable spending patterns. Recent reports from a number of jurisdictions with well-developed financial markets seem to agree that regulatory instruments play an important role in leaning against such phenomena. What is less clear is that central bankers recognise that they might have an even more important role to play. In light of the recent surge in asset prices worldwide, this issue needs urgent attention. Yet another boom-bust cycle could have negative implications, social and political, stretching beyond the sphere of economics.
Whoever started the fire in the first place, and whether or not there was really a crisis which required bailouts the first time around, the fact is that the government is ensuring more – and – bigger fires in the future.