If George Bailey had never lived. . .

. . .we wouldn’t be having this financial meltdown! Washington Post columnist Ross Douthat puts the blames our current financial meltdown on George Bailey, of Frank Capra’s masterpiece It’s a Wonderful Life:

Jimmy Stewart’s George Bailey was actually a pretty savvy businessman. And it’s even easier to forget the precise nature of his business: putting the downscale families of Bedford Falls into homes they couldn’t quite afford to buy.

This is the substance of the great war between Bailey and Lionel Barrymore’s Mr. Potter, the richest, meanest man in Bedford Falls. Potter is against easy credit and the suburban dream, against the rabble moving out of his tenements and buying homes, while the Bailey Building and Loan exists to make suburbia possible.

The Bailey vision is economic and moral all at once. In a mid-movie peroration, the hero lectures Potter and a gaggle of local entrepreneurs on the virtues of democratizing homeownership: “You’re all businessmen here,” he presses them, sounding for all the world like a politician defending Fannie Mae and Freddie Mac against their critics in 2004 or so. “Doesn’t it make them better citizens? Doesn’t it make them better customers? . . . What’d you say a minute ago? They had to wait and save their money before they even ought to think of a decent home. Wait? . . . Do you know how long it takes a working man to save five thousand dollars?”

In the movie, George Bailey has God on his side, but a real-life Bailey would have had Uncle Sam. “It’s a Wonderful Life” debuted in 1946, more than a decade after Franklin D. Roosevelt’s National Housing Act kicked off a half-century of federal policymaking aimed at making it dramatically easier for working-class Americans to buy and keep their homes.

It’s true that the same lenders people are condemning as “predatory” were praised not long ago for devising ways to allow lower-income people to buy their own homes. Douthat does say that George Bailey’s goal was an admirable one and worth making possible, but still, such well-intentioned schemes helped bring down the economy.

Looking to the communists to save capitalism

One of the hopes for the global financial meltdown is that China can save capitalism.

More likely, though, is that we will become like China, adopting its model of letting people make money under a state-controlled economy. In other words, letting people have wealth without freedom. I suspect that most Americans would be OK with that tradeoff.

Don’t just blame deregulation

Sebastian Mallaby, writing in “The Washington Post,” argues that, contrary to much of the rhetoric, deregulation was not to blame for the financial meltdown. Excerpt:

The key financiers in this game were not the mortgage lenders, the ratings agencies or the investment banks that created those now infamous mortgage securities. In different ways, these players were all peddling financial snake oil, but as Columbia University’s Charles Calomiris observes, there will always be snake-oil salesmen. Rather, the key financiers were the ones who bought the toxic mortgage products. If they hadn’t been willing to buy snake oil, nobody would have been peddling it.

Who were the purchasers? They were by no means unregulated. U.S. investment banks, regulated by the Securities and Exchange Commission, bought piles of toxic waste. U.S. commercial banks, regulated by several agencies, including the Fed, also devoured large quantities. European banks, which faced a different and supposedly more up-to-date supervisory scheme, turn out to have been just as rash. By contrast, lightly regulated hedge funds resisted buying toxic waste for the most part — though they are now vulnerable to the broader credit crunch because they operate with borrowed money.

If that doesn’t convince you that deregulation is the wrong scapegoat, consider this: The appetite for toxic mortgages was fueled by Fannie Mae and Freddie Mac, the super-regulated housing finance companies. Calomiris calculates that Fannie and Freddie bought more than a third of the $3 trillion in junk mortgages created during the bubble and that they did so because heavy government oversight obliged them to push money toward marginal home purchasers. There’s a vigorous argument about whether Calomiris’s number is too high. But everyone concedes that Fannie and Freddie poured fuel on the fire to the tune of hundreds of billions of dollars.

So blaming deregulation for the financial mess is misguided. But it is dangerous, too, because one of the big challenges for the next president will be to defend markets against the inevitable backlash that follows this crisis.

History restarts, as American brand fails

I enjoy reading scholars defending their theories after they have been proven wrong. In 1989, Francis Fukuyama wrote a provocative essay entitled “The End of History.” Written at a time when communism was collapsing, Fukuyama argued that democracy and free market economics have won. There are no alternatives. That means that the conflicts that have defined history are over. We will now live happily ever after.

In this column, Fukuyama (who is a real scholar with a conservative bent) revisits his thesis in light of the new Russian aggression, the persistance of anti-democratic rule in places like China, and the new host of international conflicts. He insists that his point is still valid in that there are no IDEOLOGICAL competitors to democracy and capitalism.

He does mention Islam and nationalism, but I think he underestimates the former as an all-encompassing totalitarian ideology. And I think he misses what China may be creating: A synthesis of totalitarianism and capitalism that may well crystalize into a new ideology. (It will be similar to National Socialism, which we have seen before.)

But in his latest column, Fukuyama goes further and perhaps changes his tune. Writing after the meltdown and the bailout in the financial market, he says that the “American brand” is damaged. The financial crisis has made American-style capitalism look bad. And American-style democracy has taken a hit because of the way it is being used to justify the war in Iraq. As an alternative, he says, nations around the world might consider the “Russian model” or the “Chinese model.”

Democracy and the Bailout

Whatever the legislature decides about the Wall Street bailout, it is evident that most of the American people oppose it. This seems to be true of both liberals and conservatives, Democrats and Republicans.

The conventional wisdom among our rulers, of course, is that these matters are very technical and complicated, things ordinary citizens just do not understand. But still, even setting aside the condescension to voters that afflicts our ruling class. . .Under a democracy–or even a democratic republic–the people are supposed to be the ultimate rulers. For that system to work, the people have to be educated enough to understand the issues they must deal with (which is why classical liberal education developed, defined as the education fitting for a free [libera] citizen). Yes, we have reverted to education “servilis” (the education fitted for a slave, consisting of mere job training), which makes self-government far more difficult. Still, our politicians are supposed to answer to the people.

Theoretically, politicians convinced a certain course is right should try to persuade–or educate–the people before taking a major course of action they would oppose. I realize the arguments about the dangers of mass democracy vs. the need for autonomous lawmakers, but surely the will of the people should have some relevance. Is the people’s only power over their government one that comes every few years when they can vote someone out of office? Doesn’t democracy entail more than that?

Pay off the bad mortgages

The Senate passed a sweetened-up version of the $700 billion Wall Street bailout–sorry, Mainstreet rescue–bill. The House is supposed to take it up on Friday. In the meantime, we will continue to post about alternatives.

Yale economists Jonathan G.S. Koppell and William N. Goetzmann point out that the reason the assets are “toxic” is that certain people can’t pay their mortgages. And if government buys them, the people STILL won’t be able to pay their mortgages. So here is another way to spend that $700 billion:

The financial crisis is a liquidity crisis, yes, but it is ultimately a product of homeowner failures to pay. Unless this fundamental problem is fixed, we will continue to see — and need to treat — the symptoms. The proposed bailout ignores this. Yet the sum being demanded from taxpayers is almost certainly more than sufficient to pay off all currently delinquent mortgages.

If the government did this, all the complex derivatives based on these mortgages would be as good as U.S. Treasuries. Their fair value would jump to 100 cents on the dollar, rescuing teetering financial institutions. The credit markets would be resuscitated overnight. Foreclosures would stop. . . .

Implementation could follow the example of the Home Owners’ Loan Corp., which in the 1930s issued new mortgages to a quarter of American homeowners. The government could offer to refinance all mortgages issued in the past five years with a fixed-rate, 30-year mortgage at 6 percent. No credit scores, no questions asked; just pay off the principal of the existing mortgage with a government check. If monthly payments are still too high, homeowners could reduce their indebtedness in exchange for a share of the future price appreciation of the house. That is, the government would take an ownership interest in the house just as it would take an ownership interest in the financial institutions that would be bailed out under the Treasury’s plan.

All this could be done through the Federal Housing Administration, with the help of Fannie Mae and Freddie Mac, which have the infrastructure to implement this plan rapidly. An equity participation structure would prevent thousands of foreclosed homes from being dumped on a strained housing market and would allow prices to reach a new equilibrium that is based on realistic demand for houses rather than on easy money or impending foreclosures.