Wednesday, September 24, 2008

Here's A Radical Thought   [John Hood]

If you want to learn how to manage a winning baseball team, don't spend a lot of time talking to losing baseball managers. If you want to learn how to make it in the music industry, don't spend a lot of time talking to "artists" who've never had a gig or released an album. If you want to learn how to make a really good pasta from scratch, don't spend a lot of time talking to, well, me.

In the current financial debate, if you want to figure out how policymakers can do the most good with the least amount of harm to market incentives, the broader economy, and American freedom, don't spend a lot of time talking to Fannie/Freddie apologists and Wall Streeters. They have huge personal incentives to spin you, incentives that do not necessarily align with the interests of taxpayers. Instead, talk to leaders of banking and finance firms that continue to perform fairly well in a difficult environment.

John Allison is chairman of North Carolina's BB&T, one of the biggest and most successful banks in the U.S. (though Tar Heel State rivals Bank of America and Wachovia are larger still). He is also a passionate believer in freedom (full disclosure: he's a donor to my think tank and his company is a sponsor of my radio program). He dislikes the Paulson Plan, and thinks better alternatives exist. Here's part of what he has to say in a new public letter on the subject:

BB&T is a $136 billion multi-state banking company. We have 1,500 branches throughout the mid-Atlantic and Southeastern states. While we have been impacted by the real estate markets, we continue to have healthy profitability and a strong capital position.

We think it is important for Congress to hear from the well-run financial institutions as most of the concerns have been focused on the problem companies. It is inappropriate that the debate is largely shaped by the financial institutions that made very poor decisions.

[Snip]

Freddie Mac and Fannie Mae are the primary cause of the mortgage crisis. These government supported enterprises distorted normal market risk mechanisms. While individual private financial institutions have made serious mistakes, the problems in the financial system have been caused by government policies including, affordable housing (now sub-prime), combined with the market disruptions caused by the Federal Reserve holding interest rates too low and then raising interest rates too high.

There is no panic on Main Street and in sound financial institutions. The problems are in high-risk financial institutions and on Wall Street.

While all financial intermediaries are being impacted by liquidity issues, this is primarily a bailout of poorly run financial institutions. It is extremely important that the bailout not damage well run companies.

Corrections are not all bad. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom. It is important that any rules post “rescue” punish the poorly run institutions and not punish the well run companies.

A significant and immediate tax credit for purchasing homes would be a far less expensive and more effective cure for the mortgage market and financial system than the proposed “rescue” plan.

There’s a lot more. You can read the letter in its entirety here.

09/24 06:00 PMShare