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Does It Take a Panic to Stop a Panic?

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"Without immediate action by Congress," President Bush warned last week, "America could slip into a financial panic." Instead, Bush wanted a political panic. The only way to avert "a long and painful recession" in which "millions of Americans could lose their jobs," he said, was to send the Treasury Department on an unprecedented Wall Street buying spree.

But Treasury Secretary Henry Paulson was premature in thinking the administration's scaremongering had produced "a bipartisan consensus for an urgent legislative solution." A bailout bill that reached Congress on Monday, just 10 days after Paulson first proposed using taxpayer money to relieve financial institutions of their bad investments, was narrowly defeated in the House. Still, the specter of blind bipartisanship, which may yet prevail, should give pause to anyone who hopes electing a Republican president will curb the excesses of a Democratic Congress.

The issue has hurt John McCain in more obvious ways as well. The Wall Street bailout focused voters' attention on the economy, an area where, rightly or wrongly, they trust Barack Obama more.

McCain looked like a grandstanding doofus when, trying to gain a political advantage, he melodramatically "set politics aside" and rushed to Washington, where he vainly sought to broker a bailout deal. After saying Friday night's presidential debate would have to be postponed, for the good of the country, until an agreement had been reached, he discovered the country could spare him for a few hours after all and flew to Mississippi, where he achieved the bipartisanship that had eluded him in Washington.

"We are going to have to intervene; there's no doubt about that," said Obama. "We have to move swiftly." McCain sounded even more panicky, saying there's "no doubt about the magnitude of this crisis." Unless Congress does something to "fix the greatest fiscal crisis in our time," he said, we will see "failures on Main Street, and people who will lose their jobs, and their credits, and their homes."

McCain added, "the first thing we have to do is get spending under control in Washington." Right after letting the Treasury Department spend $1 trillion on the lousiest assets it can find. (Rounding up the number seems reasonable given the arbitrariness of the official $700 billion estimate. "It's not based on any particular data point," a Treasury Department spokeswoman told (SET ITAL) Forbes (END ITAL). "We just wanted to choose a really large number.")

Neither candidate wondered whether government officials spending other people's money can realistically be expected to do a better job of valuing mortgage-backed securities than myriad investors with their own money on the line. Neither worried that government ownership of so many securities, including stock in financial institutions, would create conflicts of interest and encourage politically motivated market manipulation.

Neither said it was dangerous to rescue Wall Street firms from their own mistakes instead of letting the market punish them, or unfair to make taxpayers pick up the tab. Neither mentioned the problem of moral hazard, where the expectation of a bailout leads people to take risks they otherwise would avoid. Most fundamentally, neither questioned the premise that Congress had to choose between a recklessly rushed "solution" and economic catastrophe.

More than 100 economists signed a Sept. 23 open letter warning Congress "not to rush," saying "a subsidy to investors at taxpayers' expense" is morally and economically problematic. "Fundamentally weakening [credit] markets in order to calm short-run disruptions is desperately short-sighted," they said. Three days later, 44 economists led by former House Majority Leader Dick Armey said the bailout plan "poses a significant threat to taxpayers while failing to address fundamental problems."

Instead of heeding these warnings, Obama and McCain listened to the likes of White House spokesman Tony Fratto, who said failing to approve the bailout by the end of last week was "unthinkable." "We have to get something done," one of the candidates insisted on Sunday. "The option of doing nothing is simply not an acceptable option," the other declared.

Who said what? Does it matter?

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