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therieb tries to understand "conservatives"...

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Greetings conservative America! Apparently, I'm one of you! I've been kicked out of the liberal temple for daring to question the ascendance of Barack "The One" Obama. My so-called liberal friends have cursed me by bell, book, and candle, (or perhaps better by wind chime, Kindle, and low-energy halogen flashlight) and sent me packing, so I thought I'd introduce myself and snuggle up to my new ideology. Before we get too cozy, however, there are one or two points we need to clear up. The first of these, in the wake of the government taking over the mortgage companies Fannie Mae and Freddie Mac, and the impending implosion of Lehman Brothers Securities, is what is the free market you people are always talking about?

If I understand my new conservative mantra correctly, economies work best with as little government intervention as possible. Taxes should be low or non-existant, and regulation by the government is always an evil impediment to progress and innovation. The market should be allowed to develop freely according to the laws of supply and demand, just as Adam Smith described them in 1776. Leaving aside the anachronistic and incomplete reading of Smith, who was most interested in avoiding taxes imposed by the British monarch, it is difficult to understand how conservative groups are applauding the Treasury's decision to take over Fannie and Freddie. By the end of the weekend, the federal government will have, in all likelihood, guaranteed the bonds of the Lehman Brothers investment firm as well, with nary a peep of protest from my new conservative brethren.

When entering the conservative family, I first need to choose exactly which table I want to sit at. There's the kiddie table, at the head of which sits Rush Limbaugh and his talk show ilk, screaming conspiracies and vitriol over the airwaves. I never liked the kiddie table when I was I child and like it even less today. A little more up-market, but equally bezirk are such publications as Buckley's National Review and Townhall.com, which, while advertising pseudo-intellectuality and Buckley's penchant for sailing, (just as New England as the Kennedys!) maintain the raucous partison shouting that make publications like Ms. Magazine and the Progressive completely unreadable. Then there are the lofty heights of conservative publications like the Weekly Standard and Foreign Affairs. Some of the people who write for these publications have real jobs, often as policy makers or at conservative think tanks, and others are syndicated in major newspapers. William Kristol, the editor of Weekly Standard, is on the Times editorial page as a token conservative, sharing that duty with the milder, folksier, homesier David Brooks. The economist-in-chief at the Standard is Irwin Stelzer, who also writes for the Times of London (like the Standard, a Murdoch property), so I look to him for the official, brainy, conservative ideological interpretation of the latest government takeovers and leveraged buyouts of investment firms.

Unfortunately, Mr. Stelzer had not been very helpful of late. His comments on the Freddie and Fannie have been restricted to a tepid endorsement of Secretary Paulson's actions leading off an article blaming entitlement programs for raising the deficit. Conservative commentators have taken a similar line explaining the bailout of Bear Stearns earlier this year: "it was a terrible but necessary thing the government did to protect the market from collapsing." Now there are two obvious objections to this line of reasoning. The first has been talked about in the media for over a week now. What happened to the free market? Why are we conservatives so eager to bail out investment banks and the mortgage industry but not other concerns? Isn't this free market talk just amazing hypocrisy? Of course it is! But that's not really what bothers me about the conservatives' response.

Let's agree that there is at least a lot of, er, confusion among conservatives when it comes to defining government meddling versus necessary government intervention. I'm concerned about something else. It appears that writers like Stelzer are unable to imagine any manipulation of the market that does not come from the government. To understand what I mean, let's look at the current crisis and how we got there. If my understanding is correct, the current credit crisis was precipitated by two related events. First, lax regulation of the mortgage industry over the last ten to fifteen years allowed lenders to write home loans for borrowers who were clearly unable to pay back the debt. Second, those bad loans were turned into bonds that were sold as securities, often to banks, and always with triple A ratings from such rating agencies as S&P, Moody's and Fitch. In the old days, these bonds were investment grade, being constructed of 30 year fixed mortgages held by borrowers who had jobs. The bonds from the so-called “NINJA” loans, (no income, no job, and god knows what the “a” stood for) were a much riskier bet, but the ratings agencies kept the highest rating on these exotic loans in any case. All was well while home prices continued to rise. The occasional foreclosure was an opportunity for the lending bank to sell the property at a profit. When the housing bubble burst, however, and more of these homes went into foreclosure, the bonds became worthless, because they were written against mortgages that were now worth more money than the properties they were attached to. Banks , hedge funds, and investment houses like Bear Stearns and Lehman brothers found themselves holding worthless securities as assets, and have been unable to raise sufficient capital to continue business.

The trouble I have understanding my new conservative friends is with the language they employ when they describe these events. Stelzer refers to the people who gave mortgages to Welfare recipients as over enthusiastic, or in the worst case, rambunctious scamps who got a little out of control. The complex instruments created to hide the risk in the securitized mortgages are called overly innovative. Bond rating companies who continued to rate the mortgage brokers' bonds as triple A are considered to have made an understandable mistake. Stelzer and his friends are painting our current economic situation as an aberation, a spell of unpreventable bad weather, or a big oops. At their most dire, they refer to a “moral hazard” brought about by allowing the government to bail out bad business decisions with taxpayers' money. How will the investment community behave, they wonder aloud, if they know the government will step in to clean up their riskier bets under the mantra of “too big to fail?”

Of course what Stelzer and others call a “moral hazard” is actually an immoral certainty. Over the last twenty years, during both Democratic and Republican administrations, we have seen the government repeatedly step in to bail out businesses that should have failed. Long Term Capital Management in 1999, Bear Stearns, Fannie and Freddie, and now, probably Lehman Brothers are only the most recent examples. Time and time again, efforts made by the financial industry to police itself have failed utterly, resulting in a mad scramble to the Federal Reserve for assistance. I don't expect Stelzer and his merry men to call for tighter government regulation. What I cannot fathom, however, is their reluctance to punish the guilty.

Financial crises like the one the U.S. is currently experiencing are not events like the weather. They are created by men, acting in concert, in order to make lots of money. No one involved in the current crisis wanted it to happen, but they were all too happy to ignore the warning signs in order to increase shareholder profit. Agents continued to deal in predatory loans. Bond rating agencies looked the other way as the quality of their charges' assets declined. Investment banks and hedge funds continued to plow money into real estate-backed securities even as the bubble burst. Regulators were absent from the scene. As a newly minted conservative, I am pawing the ground and snorting for blood at these people who broke the system. How can the free market in real estate function if lenders grant loans to those who are unable to pay? How can investors make informed decisions if the ratings agencies continually over rate securities, and look the other way as such companies as Freddie Mac and Citicorp cook the books to hide billions in losses? It's no wonder the government had to step in to unravel this mess. When Stelzer et. al. write about this situation, however, they describe it as “overly-complex,” or that it grew too fast. These writers, who are so quick to warn of the evils of over-regulation are completely unwilling to confront its opposite, which is manipulation by men the private sector. Occasionally the Wall Street Journal will include an editorial urging the Ali Babas of the investment world to reign in their forty thieves lest they bring about more regulation from Uncle Sam. The true ideologs are unwilling to go even that far.

Stelzer, dear boy, this crisis was set in motion not by chance but on the golf course. If we listen hard we can hear how it all went down: “Goddamn, this real estate market is once in a lifetime, I'm flipping cockroach infested shacks on Martin Luther King Blvd. for 300% profit every two months. Any more beer in that cooler?”
“I switched to cocaine half an hour ago...Yeah, shit, and I'm writing loans for guys who just got out of prison and have thirty credit cards, it's amazing.”
“You said it, and the firm's stock is solid. Tell you what, what if we started mixing these garbage loans in with our bond issues? At the rate the market is going, our share price will go through the roof!”
“Whoa, whoa, whoa! Dude, what are you thinking? (sadly Stelzer, we have reached a point in American history where I feel sure our investment geniuses do, in fact, say dude), You know and I know that those losers don't have a chance in hell of paying off these loans, what will that do to the company's credit rating? And where the hell did my ball go?”
“Man, you worry too much! Look at the market, even if these idiots are foreclosed on, the value will have risen 50% and the bank walks away happy. And the ratings agencies don't even understand the bonds they're rating, they see Countrywide and they think 30-year fixed. They slap a AAA on it and no one's the wiser. Everyone wins!”

Yeah, that's probably how it all went down, except for the everyone wins part. Look, my new friends, innovation is not a synonym for collusion. If we are really fans of the free market, we need to support heavy penalties for people who break the system. We don't need new laws. Playing hide the salami with billions of dollars in losses on the books is already illegal! Where's the outrage? If I were Stelzer, I'd be calling for criminal investigations and jail sentences, and not in some nice white collar prison, I'm talking about the anal sexy kind.

So I wait patiently while the literati of the right straighten out my confusion. If regulation isn't the answer, what is? I'm afraid polite requests that the giants of the financial world play nice and keep the country's interests at heart aren't going to be sufficient. As Stelzer rightfully points out, the Fannie and Freddie bailout alone has the potential, however small, of doubling the national debt.

Next week: who took the conserve out of conservativism?