How can a Conservative Support the Bailout?

Kyle asks, quoting Glenn Greenwald, how one can support government intervention into the US economy on the massive scale that the proposed $700B bailout would constitute.

Greenwald, politically tempestuous but ideologically difficult to place, asks in Salon.com:

Can anyone point to any discussion of what the implications are for having the Federal Government seize control of the largest and most powerful insurance company in the country, as well as virtually the entire mortgage industry and other key swaths of financial services? Haven't we heard all these years that national health care was an extremely risky and dangerous undertaking because of what happens when the Federal Government gets too involved in an industry? What happened in the last month dwarfs all of that by many magnitudes.

Greenwald's position is, it seems, basically that "Wall Street greed" is responsible for the problem, and that "Wall Street" thus deserves to take the hit without help:

What is more intrinsically corrupt than allowing people to engage in high-reward/no-risk capitalism -- where they reap tens of millions of dollars and more every year while their reckless gambles are paying off only to then have the Government shift their losses to the citizenry at large once their schemes collapse? We've retroactively created a win-only system where the wealthiest corporations and their shareholders are free to gamble for as long as they win and then force others who have no upside to pay for their losses. Watching Wall St. erupt with an orgy of celebration on Friday after it became clear the Government (i.e., you) would pay for their disaster was literally nauseating, as the very people who wreaked this havoc are now being rewarded.

The "let the greedy ones take the fall" idea is widely popular throughout the left, so far as I can tell, reading around the last few days. On the conservative side, many are concerned about the precedent of the government stepping into the private sector in such a massive way. Mark Hemmingway of National Review Online writes:

Paulson and Fed Chairman Ben Bernanke would have you believe that it’s perfectly natural that the solution to a large financial crisis is throwing a large amount of money at the problem. They seem to hope that no one will notice that the problem with the bailout isn’t ironing out some of the fiscal particulars: It’s philosophical.

When government seizes control of a critical industry, that’s, uh, what do you call it? Oh, yes, socialism. “The government is telling us that capital and credit markets cannot, for several reasons, solve the current crisis on their own — only the federal government and its massive taxpayer base have the authority and the resources to solve it,” noted financial columnist James Ledbetter. “That is state socialism: the philosophy preached by the founders of the Second International, by the radical wing of the American labor movement, through the formation of the Soviet Union and its satellites, and now by Henry Paulson.”

While readily open to the criticism that I am in no position to throw stones when it comes to lack of knowledge, it seems to me that both of these approaches fail to understand what it being proposed, and why it is probably a good idea under the circumstances.

What a lot of people seem to have convinced themselves is going on here is that either lots of major companies are being "nationalized" (that is: taken over and run by the government) or else that the government is planning to give away $700B to large Wall Street firms in order to keep them from going bankrupt. Neither one of these is really true.

In the case of AIG, it has effectively been partly seized by the government to the extent that the US government now owns 79.9% of the AIG's stock. As the majority stock holder, and as the provider of a $80B line of credit, the government also demanded some management turn-over at AIG. However, AIG is not being actively run as a government institution. Rather, it's being broken up and its segments and assets sold off until the remaining core of the company can pay of the US government and become fully independent again. That is indeed a very large intervention, and I wouldn't normally like to see that sort of thing being done under non-emergency circumstances, but it is not the sort of active government running of major industries that socialism (or fascism) involves.

In regards to the $700B bailout -- the government is not planning (under any of the plans under discussion) to simply give money to companies in order to keep them from going bankrupt, nor is it buying all the defaulted mortgages and thus investing in a total loss. Rather, the idea is to allow the treasury department to buy and hold, and then eventually resell, assets which are currently in trading free fall due to market fears. It goes basically like this: Because of all the fear in the market right now, and because companies known to hold a lot of mortgage-based securities are seeing their stocks go into freefall, and because no one knows exactly how many of the mortgages rolled into a given security will go bad -- no one wants to buy mortgage backed securities at all right now. Because no one wants to buy them at any price, their effective sale value is approaching zero in many cases. And yet, the majority of the mortgages behind many or most of these securities will indeed pay off in the long run. So there is a value to the security -- if you are willing to hold onto it until the market for them picks up again or until the mortgages are paid off.

What Paulson is proposing to do is give the US Treasury a very large pot of money, and allow it to invest in these securities.

I'd say that Megan McArdle has it right when she says:

Any bailout plan needs to walk a very, very fine line. It must let straightened financial institutions sell the debt that is dragging down their portfolios. But it must do so in a way that does not convince future bankers that excessive risk taking can be nearly painless. That means paying just enough for the securities to keep the banks from failing, not enough to let them avoid painful losses.

Investing legend Warren Buffet (whose political views I almost universally disagree with, but who is a very smart guy when it comes to business) has weighed in arguing that a bailout is seriously necessary, but also pointing out that due to the buy, hold, sell nature of the proposed bailout plan, the US government might actually end up making a good deal of money at it before all is said and done. (He's also shown some confidence in the underlying "fundamentals" of the economy by choosing this moment to invest $5B, about 1/10th of his fortune, in Goldman Sachs.)

So, if done right, the $700B isn't just gone, in fact it's possible that the government would actually turn a decent profit on it in the end. The devil is, however, in the details. As McArdle and Buffet both say, it's important that the government buy these securities at a market rate. On the one hand, they're propping up the market by keeping these assets from going to a value of zero, which would result in cascading bank failures. On the other hand, they need to buy them at rates that reflect (and indeed are discounted below) what the securities are likely to eventually pay off at.

Unfortunately, all this needs a little bit of calm thought, and not many people seem eager to give it that. CNN, which over the last few weeks has been solemnly opining on the importance of experience and elite credentials, is now going full-throated populist and running a raft of v-logs by people describing "What I would do with $700 billion."

In democracy, we generally get the government we deserve, and my fear (given that I'm fairly well convinced that failure to do anything in this situation could cause a pretty massive economic meltdown as a result of the freezing over of the credit markets) is that we may find ourselves deserving to engage in populist histrionics rather than pulling our collective rear end out of the fire. It is satisfying, in a sense, to say, "Why should we bail out these stupid rich people who took unsafe risks," but if telling things sort themselves out really did result in the credit market coming to a standstill, we could end up seeing a pretty massive contraction of the GDP, and a lot of us who work for companies that give credit or get credit or have their cash-on-hand invested in money market funds would find ourselves out of a job. We could assure ourselves that Wall Street had deserved all this, but in the end it's not the Wall Street barons who would end up in the bread lines -- it's the low level workers who found themselves out of work without savings who would be suffering a lot more than the millionaires who had to cancel their European vacations and yacht orders.

But even with all these: Why do I not as a small government conservative (who's argued we should avoid centralizing health care because it would be bad for society) also oppose such a massive government economic action?

Well, I'm not opposed to large government action in principle, I'm opposed to it in most circumstances because I think it's often worse for society than private action. However, government (indeed, government acting in a centralized and semi-dictatorial fashion rather than consulting the maximum number of voters at every step) is often the best approach to large emergency situations that require risky and decisive action.

For instance, the presidents during both our largest wars (the Civil War and WW2) assumed powers that bordered on the dictatorial, and controlled massive portions of the economy through government spending. (During the peak of WW2, government spending accounted for 50% of the GDP.) Similarly, after a truly massive natural disaster, the federal and state governments are often the best positioned to move in large amounts of manpower, material and money in order to get things back up and running quickly. Waiting for things to get fixed organically might conceivably be better in some sense, but I think most people would agree that it's appropriate for the government to step in during such disasters.

There is inevitably a lot of foolishness and waste perpetrated by governments even in such dire situations (the whole "greatest generation" idea came later -- read the novels written during the 40s for commentary on the complete absurdity of much that was done during the war, despite the overall good aims and results) but because they are large and capable of acting decisively to achieve specific aims, they seem to be best suited to deal with certain kinds of situations. So my support for the government stepping in to try to stabilize credit markets is based on this idea that it is sometimes in times of huge crisis appropriate for the government to step is as and take massive and purposeful action. And in keeping with that kind of theory, it seems to me that the number of decision makers should actually be quite small, as with generals in a war. In that sense, I would support Paulson's request for no oversight -- though I'd feel a lot more comfortable if the legislation put one person or a small board of people in charge for the duration of the exercise so that it couldn't become a political football.

Why not, by the same rationale, declare an "emergency" and nationalize healthcare? Because while I think that the government can at times succeed well in taking massive action to achieve very specific objectives in the short term, it seems to me that massive centralized organizations (whether governmental or private) are very bad at running operations on a day-to-day basis while keeping their priorities straight. Providing "universal health insurance" is thus something I think the government (or any other large single institution) is very badly suited to do. I would support a huge centralized government action to deal with a specific health problem, say a sudden and deadly epidemic. But I think that if put in charge of everyone's day-to-day healthcare, it would almost inevitably make things much worse for us in the long run.