Sunday, September 28, 2008

John Mauldin's Open Letter to his Congressman Regarding the Bailout

Last month ("The Credit Crisis a Year Later") I mentioned John Mauldin's excellent, early column on the credit crisis ("The Panic of 2007"). Mauldin was one of the first to grasp the scale of the credit crisis and offered the most lucid explanation of it that I've seen. Mauldin's Friday column ("Who's Afraid of a Big, Bad Bailout") was written as an open letter to his Congressman, Joe Barton of Texas, explaining why he should vote for a bailout despite its current unpopularity among his constituents. It's worth clicking the link above to read the whole thing and see the helpful charts, but below are some excerpts.

Dear Joe,

I understand your reluctance to vote for a bill that 90% of the people who voted for you are against. That is generally not good politics. They don't understand why taxpayers should spend $700 billion to bail out rich guys on Wall Street who are now in trouble. And if I only got my information from local papers and news sources, I would probably agree. But the media (apart from CNBC) has simply not gotten this story right. It is not just a crisis on Wall Street. Left unchecked, this will morph within a few weeks to a crisis on Main Street. What I want to do is describe the nature of the crisis, how this problem will come home to your district, and what has to be done to avert a true, full-blown depression, where the ultimate cost will be far higher to the taxpayers than $700 billion. And let me say that my mail is not running at 10 to 1 against, but it is really high. I am probably going to make a lot of my regular readers mad, but they need to hear what is really happening on the front lines of the financial world.

First, let's stop calling this a bailout plan. It is not. It is an economic stabilization plan. Run properly, it might even make the taxpayers some money. If it is not enacted very soon (Monday would be fine), the losses to businesses and investors and homeowners all over the US (and the world) will be enormous.


If we act now, we will start to see securitization of mortgages, credit cards, auto loans, and business loans so that the economy can begin to function properly.

What happens if we walk away? Within a few weeks at most, financial markets will freeze even more. We will see electronic runs on major banks, and the FDIC will have more problems than you can possibly imagine. The TED spread and LIBOR will get much worse. Businesses which use the short-term commercial paper markets will start having problems rolling over their paper, forcing them to make difficult cuts in spending and employment. Larger businesses will find it more difficult to get loans and credit. That will have effects on down the economic food chain.


This deal needs to be done by Monday. Every day we wait will see more and more money fly out the doors of the banks, putting the FDIC at ever greater risk. Panic will start to set in, moving to ever smaller banks. Frankly, we are at the point where we need to consider raising the FDIC limits for all deposits for a period of time, until the Stabilization Plan quells the panic.

I understand that this is a really, really bad idea according classical free-market economic theory. You know me; I am as free market as it comes. But I also know that without immediate action a lot of people are really going to be hurt. Unemployment is not a good thing. Losses on your home and investments hurt. It is all nice and well to talk about theories and contend the market should be allowed to sort itself out; and if we have a deep recession, then that is what is needed. But the risk we take is not a deep recession but a soft depression. The consequences of inaction are simply unthinkable.

Joe, I am telling you that the markets are screaming panic. Yes, Senator Richard Shelby has his 200 economists saying this is a bad deal. But they are ivory tower kibitzers who have never sat at a trading desk. They have never tried to put a loan deal together or had to worry about commercial paper markets collapsing. I am talking daily with the people on the desks who are seeing what is really happening. Shelby's economists are armchair generals far from the front lines. I am talking to the foot soldiers who are on the front lines.

Every sign of potential disaster is there. You and the rest of the House have to act. It has to be bipartisan. This should not be about politics (even though Barney Frank keeps talking bipartisan and then taking partisan shots, but I guess he just can't help himself). It should be about doing the right thing for our country and the world. I know it will not be fun coming back to the district. Talking about TED spreads and LIBOR will not do much to assuage voters who are angry. But it is the right thing to do. And I will be glad to come to the town hall meeting with you and help if you like.


Anonymous said...

Great read!

John said...

I love Mauldin's stuff, and this was a good letter, but his "soldiers on the front lines" left a bad taste in my mouth. I guess a comparison between a Ferrari driving bond trader who had to cancel weekend plans in the Hamptons to spam banks with his resume while he watches spreads vs. libor and a soldier in the trenches just doesn't sit well with me. I'm not really sure how they would know how to fix this mess better than the "armchair general" economists either.

J K said...

^haha, good post.

I find it personally disconcerting to see elected officials not giving pause to the fact that most americans are up in arms over the deal. How can these idiots dare to be condescending, given their record? Why not consider alternatives, such as one that was posted here?

Perhaps its because our elected officials know that whatever they do, we as a country will bend over a barrel and take it. We have so many outlets now for releasing our opinions online that they are drowned out in a foamy sea of of blather. In the past, people took to the streets to make themselves seen and heard. Now we all become pundits to our friends online and release our outrage and greivances in a worthless manner, maybe pretending someone of importance will take note. I'm as guilty as anyone...that will change soon though.

Anyone see that the WaMu CEO is entitled to 19 million after just 17 days on the job? *Shareholders* shouldn't be too happy about that.

DaveinHackensack said...

"I guess a comparison between a Ferrari driving bond trader who had to cancel weekend plans in the Hamptons to spam banks with his resume while he watches spreads vs. libor and a soldier in the trenches just doesn't sit well with me."

Point taken. You may be heartened to know that there are a handful of traders who have actually been on the real front lines. One example, Owen West, comes to mind.

"Anyone see that the WaMu CEO is entitled to 19 million after just 17 days on the job? *Shareholders* shouldn't be too happy about that."

At least in that guy's case, it's hard to blame the collapse on him. You can only screw up a company so much in 17 days. Interesting question this raises though, given WaMu's parlous state when he was hired: should the board have considered the possibility that the company might go bust in a matter of weeks and specify that in the event that happened, no golden parachute for the new CEO? Maybe they could have found a tactful way to put that in writing, I don't know.