So it appears Congress has reached a deal on the Mother of all Bailouts (via WSJ):

WASHINGTON — Top House and Senate Democratic and Republican lawmakers have reached a tentative agreement on a $700 billion plan to bail out U.S. financial markets, with some predicting the measure would pass both chambers of Congress.

After a three-hour meeting, lawmakers agreed to legislative principles that would approve Treasury’s request for the funds, but would break it into installments, according to people familiar with the matter. Treasury would have access to $250 billion immediately, with another $100 billion to follow if needed. Congress would be able to block the last installment through a vote if it was unhappy with the program.

That seems like a reasonable compromise to get the bill passed and I guess that is good for the short term direction of the financial markets. A better question is whether we would need this legislation if we hadn’t gone down the bailout road to begin with. It seems to me that this “crisis” is something that is a direct result of our past intervention in the market.

We cannot go back now, but what would have happened if we hadn’t bailed out Bear Stearns? The fear at the time was that Bear was so entertwined in the system that a bankruptcy would have cause the market to “seize up”, but is that true? Based on what happened with the Lehman bankruptcy, it seems likely that the answer is no. The market opened the day after Lehman filed for bankruptcy and it would have opened the day after a Bear Stearns filing. Maybe if we hadn’t gone down that road and hidden from view the paper they were holding, banks would not be so suspicious about their counterparties now.

The only bailout that I think was something the government had to be involved in was Fannie/Freddie. Those institutions were direct creations of the government and while the government can be indirectly implicated in Bear, Lehman and AIG, Fannie/Freddie was caused directly by government action. In that sense, I suppose since they caused the problem they had to be part of the solution.

My sense is that while the market may have performed worse in the short term if we had let Bear fail, we would already be well on the way to recovery if we had. Of course, there is no way to prove that and now that we’ve gone down this path it is hard to turn back. I fear that this is accelerating the move to European style socialism and returning to anywhere near our potential growth will be a long time coming.

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