Welcome to rieblog!

I'm just trying to understand...

[More:]

Another week goes by and I'm still trying to understand my new conservative philosophy. What's happened since I last wrote? Lehman Brothers is dead. Merrill Lynch has been acquired by Bank of America, and the American International Insurance Corporation has received a taxpayer-funded bailout to the tune of $85 billion. The Dow tumbled to my father's predicted low close of 10,600 points (congratulations again on the call) and then rebounded on news that the Federal government is contemplating a bailout package that will make the Resolution Trust Corporation look like a drop in the ocean. Through it all I've been waiting for one man to explain to me what a new conservative should think about these tumultuous events. Irwin Stelzer, financial oracle of Rupert Murdoch's Weekly Standard, who has been silent through last week as the landscape of the financial world changed considerably. Then, just this morning help finally came. let's read what he has to say together.

Oy Weh! I must confess, I feel more confused than ever about what to think. I feel as though I've been told the earth is flat. Must be because I'm the new conservative on the block. Let's read a little closer and see if we can extract some guidance from Stelzer's note. This is an argument that the two remaining large investment banks in the U.S. should remain independent entities. OK, but shouldn't that depend on their ability to function as successful businesses? Perhaps Stelzer knows something he isn't writing, but I haven't heard of any pressure against either Morgan Stanley or Goldman Sachs to sell themselves, unless it's from shareholders wondering exactly what kind of assets they bought. So where's the problem? If they're strong enough to survive they will. If not, not. Stelzer continues: "this is not a very good time to make decisions about the future structure of the financial services industry. Calm heads have yet to prevail;..." So I'm just curious, when is a good time to make these decisions, and what do we do in the meantime? After all, the Fed can't keep buying companies forever, unless Bernanke and Paulson crank up the printing press...

My real confusion, however, starts at the end of the fourth paragraph when Stelzer worries over the possible demise of the two brokerage houses: "It is a question of the survival of innovation and entrepreneurship at the heart of the financial system." Innovation and entrepreneurship. When I think of those words I think of the Wright brothers, the Google boys, and perhaps even the ghouls at Microsoft. What kind of innovation is Stelzer talking about? Is writing $300,000 home loans to minimum wage earners innovative? Is chopping those loans up and repackaging them so it's impossible to know their true value entrepreneurial? When I hear the words innovation and entrepreneurship I think of creating something new. When I think of the current crisis, I think of misrepresentation, deliberate hiding of asset values, and complete blindness to risk. Couldn't we do without companies that dabble in this kind of innovation? At the end of the next paragraph Stelzer worries that when investment banks are swallowed up by boring old commercial banks: " the management problems become complex, corporatism overtakes individualism, and at best workmanlike management replaces entrepreneurial daring." I really don't see how individualism touches the behavior of the financial community, especially when it comes to the current crisis. Marking sub-prime morgages as prime assets and selling them as securities to hedge funds and investment banks required coordination and collusion among mortgage brokers, bond rating agencies, and the investment banks on a massive scale. How many winks and nods did it take to get us into a situation where some of the oldest financial institutions in the country (Larry Kudlow calls them "national treasures")have no access to capital? Stelzer, for God's sake, send in the workmen!

Stelzer isn't completely blind to the fact that the current lending crisis is largely industry created. He writes:

"One reason so many of the financial institutions which have disappeared or soon might have gotten into trouble is because they have hesitated to recognize that some of their decisions have been just awful. They have stuff on their books at valuations that are no longer close to reality, despite the general accounting rule that all assets should be on the books at their current market value--marking to market is the term accountants use."

Fair enough, but if these companies were willingly violating general accounting rules, why on earth should they be protected when they fail? Is this more innovation that we should be proud of?

Further down, Stelzer claims that the chiefs of the failed investment banks were victims of an innovation that was too complex for them to understand. Here we have another deployment of what I like to call the Jekyll and Hyde explanation of corporate leadership: geniuses worthy of $100 million dollar pay packages during the good times, incapable of understanding their own business under oath. We last saw this story during the Kenny Lay-Bernie Ebbers days of the early nineties. If these types of people are the "independent sources of ideas" that Stelzer is referring to, I say again, bring on the workmen!

Toward the end of his article Stelzer allows: “Still, it can well be argued that if finance capitalism cannot survive the failure of a single investment bank, even one not noted for superb management, perhaps it should finally be consigned to the dustbin of history. “

He quickly takes it back, but it leaves me wondering exactly where he stands. The article started as a defense of Goldman's and Morgan Stanley's independence, but as he wrote, it appears that Stelzer sensed he was getting into ideological trouble. It's no fun to argue for lax regulation on the one hand and massive bailouts on the other, and what of the values of accountability and punishment, which are cornerstones of our conservative philosophy? That, indeed, is tricky writing.

My fellow conservatives have done a masterly job of separating their values by farming them out to different writers. Stelzer is a conservative economist. He argues for free trade, low taxes, and limited regulation. Over at the Wall Street Journal, Peggy Noonan, a social conservative, argues against abortion rights and for resurrecting John Paul II. Such writers as Ward Connelly rail against affirmative action and for more “personal responsibility” for our nations minorities. Keeping these themes separate has been essential for avoiding confusion among the rank and file. It would be difficult for Stelzer to deploy personal responsibility conservativism as Dick Fuld leaves Lehman Brothers a smouldering crater, carrying away with him a multi-million dollar exit package.

I believe I've found a way to help my conservative brethren square the ideological circle in the face of this financial crisis. I'm arguing for a sea change in separating conservative values, a veritable Gramm-Leach-Bliley act for conservative philosophy. Tear down the walls! Economic conservatives believe the free market is a natural system. Intervention in such a system is harmful, but that argument gets difficult to make when all hell is breaking loose. Why not take a page from our social-conservative friends and recognize that the government is God Almighty? God doesn't busy himself regulating the day to day workings of the market, but he can be called upon, along with his ministring angels the U.S. taxpayers, to part the Red Sea when the chosen capitalists are in trouble. He will forgive the prodigal investment banker his over-leveraged sin, and not ask who has toiled longer in the fields of Wall Street. God, creator of the investment universe, can restore order to nature. We may pray to the God-government for salvation, and he will turn water into, what? Government backed securities?

There, problem solved! Always happy to help. Just a word of caution as we retool our conservative ideology in light of recent events. We should focus on the New Testement God, the forgiving one. The Old Testement guy can be pretty vengeful, and we are in an election season.