Our esteemed representatives in Washington are telling us that, without a , economic catastrophe looms.
Members of what the Bailout Party predict that, as Sen. Carl Levin, D-Mich., put it, saying no to the Big Three would "be felt throughout our economy and in every community across this country." Another senator from Michigan, Debbie Stabenow, claims that 2.5 million people would lose jobs.
Evaluating the Bailout Party's claims and track record is important. If its officials have been correct so far, the case for a $14 billion check drawn on the U.S. Treasury becomes more compelling.
Let's consider the Bailout Party's arguments during the legislative debate over the Troubled Asset Relief Program, or TARP, which already has .
President Bush in September that without a Wall Street bailout, the country would experience higher foreclosure rates, job losses, closed businesses and "a long and painful recession." Guess what? Even after doling out billions of dollars, we still have all of that, including rising unemployment, a painful recession, and a much higher deficit.
Rep. Barney Frank, the Massachusetts Democrat who provided political cover for Fannie and Freddie's excesses, echoed Bush. Frank claimed that, absent the TARP legislation, investors will "see further erosion in the value of their stocks" and foreclosures will "continue to increase." Someone should tell the good congressman that the value of the S&P index has eroded by 25 percent since mid-September, and foreclosures are continuing to increase.
Frank also claimed that credit markets are "locked up." This is what other Bailout Party officials were alleging at the time; Treasury Secretary Henry Paulson said "our credit markets froze" and Fed Chairman Ben Bernanke said that "households and state and local governments have also experienced a notable reduction in credit availability."
Few members of the media questioned those claims, even though they provided the primary justification for the TARP law. It turns out that those statements were not, to put it delicately, entirely truthful.
Exhibit A in the case against the Bailout Party is a report published by the Federal Reserve Bank of Minneapolis. It evaluates these claims: bank lending and so-called commercial paper declined sharply; bank-to-bank lending evaporated; and rates rose to unprecedented levels. The surprise is that, using the Fed's own data, the authors conclude that those "claims are myths" perpetrated by politicians and an uncritical press.
An example can be found in the New York Times' report last month about what it described as a "frozen consumer credit market." Yet the Federal Reserve said five days earlier that "consumer credit increased at an annual rate of 1-1/4 percent in the third quarter." How can an increase be "frozen?"
It's true that credit may be more difficult to obtain than a few years ago. Would-be borrowers with poor credit scores may not be able to secure a low interest rate mortgage. Some businesses are having a harder time getting loans. Consumers are receiving fewer credit card solicitations, though most of us would consider less junk mail a plus.
This is a natural response to what was probably history's largest credit bubble, and a sign that the bubble's excesses - "If you breathe, you qualify for a zero-down mortgage!" - are being purged. The market is healing itself. (Meanwhile, in this purportedly "frozen" credit market, Bank of America is offering an "introductory 0% APR" for over a year.)
Exhibit B is a report published last week by Celent, a financial services consultancy. It picks up where the Minneapolis Fed's report left off, and concludes that politicians and bureaucrats appear to have been fibbing to the American public.
It notes that household credit is very close to its all-time high, that short-term credit has become cheaper in the last year thanks to lower interest rates, and that bank lending is at or close to a record high. It says: "The juxtaposition of policymakers' statements regarding the state of the credit market are both puzzling and troubling. A variety of fundamental assertions about the state of the credit industry in the U.S. are not supported, and in many cases flatly contradicted, by the available data. In most cases, these very data are being published by the organizations led by the policymakers in question."
This may sound arcane, but it's really not. If this had been well-known three months ago, the TARP bailout may not have passed. It would have taken only 10 percent of the House of Representatives switching sides for the bill to fail; instead, they were egged on by what Rep. Brad Sherman, D-Calif., described as threats of martial law.
This time, the Bailout Party General Motors, Ford, and Chrysler at taxpayers' expense. Anyone inclined to believe claims of economic Armageddon absent a billion-dollar payday should take a close look at the outright falsehoods spread the last time around.
Declan McCullagh is the chief political correspondent for CNET. He previously was Wired's Washington bureau chief and a reporter for Time.com and Time magazine in Washington, D.C. He has taught journalism, public policy, and First Amendment law. He is an occasional programmer, avid analog and digital photographer, and lives in the San Francisco Bay area. His e-mail address is email@example.com
By Declan McCullagh