ABBERWOCKY

11/17/2008

“And, as in uffish thought he stood,
The Jabberwock, with eyes of flame,
Came whiffling through the tugley wood,
And burbled as it came!”

I couldn’t help but think of those words from Lewis Carroll’s “Through the Looking-Glass” as I listened to Treasury Secretary Hank Paulson’s recent press conference. Paulson, the 700 billion-dollar man, was indicating yet another change in direction for the Bush administration’s financial bailout plan. The stock market didn’t seem overly impressed with Paulson’s change of course, as evidenced by a further 400 point plunge in the Dow Jones average.

A recent article in Forbes magazine estimates the total fiscal stimulus put forth so far by both the Federal Reserve Board and the Treasury Department to be approximately $5 trillion. Before this avalanche of “stimulus” began, the federal debt was $10 trillion. Our federal government is potentially putting us half as much again in debt (though Fed Chairman Bernanke and Secretary Paulson would argue that taxpayers will be getting some of the $5 trillion back—they just have no clue how much or when.)

The whiffling through the tugley wood isn’t confined to the Fed and the Bush administration. Congress and the Obama team will soon be burbling as well. They have their own list of bailout targets.

The automobile industry is in dire straits and is asking for help. The state of California has already requested billions in loans to put off the tough fiscal decisions needed to rein in its $15 billion deficit. New York, New Jersey, and Michigan—to name a few—are other states tottering on the edge of bankruptcy. Many major cities will likely join the bandwagon. The line of supplicants forming at the doors of the White House and the Capitol will be long, indeed.

Before we wade further into the swamp, we might want to remember that our mission was to drain it. The original bailout was designed to thaw the freeze in lending necessary for the economy to function. The concept was for the Treasury Department to buy the bad real estate loan portfolios which were creating uncertainty in the markets. Treasury has now decided that approach is too difficult to implement and is using the bailout money to purchase preferred stock in banks--with no requirement for increased lending or for private equity to match the federal dollars.

Lending billions of dollars to struggling state and local governments would be a slippery slope. The states in the worst shape are the ones with high tax rates and excessive spending habits. Their politics are often unduly influenced by their public employee unions. These special interest groups are quick to push through tax increases and are adept at stopping any attempts to cut spending. Sending huge amounts of federal tax dollars to states that refuse to live within their means will not be popular with taxpayers in states with sound fiscal practices. The fiscally challenged states are generally the ones that gave President-Elect Obama and the Democrats in Congress their margins of victory. That being the case, they won’t be bashful about asking for favors.

Taxpayers should pray that the bailout explosion does not cause more harm than good and gets refocused to practices that will shore up the economy, not grow government. At the outset, the goal of federal intervention was to address the collapse of the housing market and restore the availability of credit for businesses and consumers. It is time to drop the jabberwocky, focus on the original goals, and minimize the impact on deficits, inflation, and the future standard of living of our children and grandchildren.