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Secret bailouts coming?

It’s bad enough that the federal government wants to spend trillions of dollars of your children’s money to bail out financial institutions that should be allowed to collapse for the good of the economy. But under the terms of the proposed bailout plan, the government will be able to rescue bad banks in secret.

Meanwhile the bank failures keep on coming, like aftershocks from an earthquake. Perhaps I shouldn’t have called it a hurricane after all.

Thursday the government took over Washington Mutual and sold it off to J.P. Morgan Chase, completely in secret. Not even the company’s board of directors had any idea the takeover was coming. Though people who read carefully through the last two weeks’ business stories would have expected such a move and would have had plenty of time to close their accounts.

The Federal Reserve, for its part, is making it easier to invest in bad banks.

Which may be why billionaire Warren Buffett has personally bailed out Goldman Sachs, risking $5 billion and making Pollyanna statements to the press about it. Of course, with a 10% dividend on those stocks, the investment is indeed high risk; Goldman Sachs could still go under.

And the Federal Bureau of Investigation has opened an investigation into Fannie Mae and Freddie Mac, Lehman Brothers and AIG to determine if the companies “may have engaged in misstatements in the course of what transpired during this financial crisis,’ FBI director Robert S. Mueller III told Congress Tuesday.

And while Congress continues to argue over the $700 billion plus bailout, er, excuse me, rescue package, talks have stalled, in part because of overwhelming public opposition to the plan. A Rasmussen poll last week showed public support for the bailout at only seven percent, and the phone lines of every member of Congress have been jammed with calls opposing any bailout.

The next institution to fall, if reading between the lines is any indication, may well be the Federal Deposit Insurance Corporation itself. That’s right, the FDIC, which supposedly insures bank deposits of ordinary people, is in desperate need of a $150 billion bailout itself, to cover the losses from all the failed banks it will have to pay out on. Interestingly, the FDIC knows which banks are likely to fail; it has a watchlist of 117 banks, according to Bloomberg News, which it thinks are likely to fail even though those banks may be “well capitalized’ — at least in theory.

Which means that the headlines are going to be filled with bank failures, bailouts and political posturing for at least several more weeks. And by that time it’ll be time to elect a new President.

The worst part is, the bailout package may allow the Treasury secretary to bail out failing financial institutions entirely in secret, much as it did with Washington Mutual this week.

The bailout bill “would allow the Treasury Secretary to make sweeping decisions while hiding behind a veil of secrecy,’ points out Michael Smallberg of the Project on Government Oversight. “We’re particularly concerned with section 2(b)(2), which would grant the Secretary the authority to enter into contracts ‘without regard to any other provision of law regarding public contracts,’ and with section 8, which would make the Secretary’s decisions non-reviewable ‘by any court of law or any administrative agency.”

No oversight by the courts? No federal procurement rules to prevent wasted money and backroom sweetheart deals? This is going to be a lot more than $700 billion at this rate.

Of course, we can’t be sure, because the bill text isn’t being published officially. That’s something that Ellen Miller, co-founder of the Sunlight Foundation, wants to change. Her site, Public Markup, argues for Congressional legislation to be published online during the markup process where bills are amended or rewritten after introduction and before being voted on.

Now have you started listening to Ron Paul yet?

“We risk committing the same errors that prolonged the misery of the Great Depression, namely keeping prices from falling,’ he said at a joint House-Senate hearing Wednesday. “Instead of allowing overvalued financial assets to take a hit and trade on the market at a more realistic value, the government seeks to purchase overvalued or worthless assets and hold them in the unrealistic hope that at some point in the next few decades, someone might be willing to purchase them.’

In an op-ed published by CNN, Ron Paul puts the moral hazard plainly: “Now that the precedent has been set, the likelihood of financial institutions to engage in riskier investment schemes is increased, because they now know that an investment position so overextended as to threaten the stability of the financial system will result in a government bailout and purchase of worthless, illiquid assets.

“Using trillions of dollars of taxpayer money to purchase illusory short-term security, the government is actually ensuring even greater instability in the financial system in the long term.’

If the government owns your mortgage and you can’t afford to pay, will you go to prison? That can’t happen if the bank holds your mortgage, but if the government does, it suddenly becomes possible, even if it seems unlikely now.

Interestingly, the financial crisis and bailout may be helping the libertarian movement, according to a Washington Post article about the Cato Institute’s response to the crisis Thursday: “Far from debunking their faith in lightly regulated capitalism, the feared meltdown confirms it.’

Cato, for their part, seems to have hit on something nobody else has: the regulations which allowed the housing bubble to exist in the first place. According to senior fellow Randal O’Toole, zoning and land use regulations are the culprit. “The housing bubble was not universal. It almost exclusively struck states and regions that were heavily regulating land and housing,’ he wrote. “In fast-growing places with no such regulation, such as Dallas, Houston, and Raleigh, housing prices did not bubble and they are not declining today.’

Finally, a transpartisan coalition has started No Cash for Trash where people can get the latest news on the financial crisis and help “stop the taxpayer-funded bailouts.’

For even more on the financial crisis as it developed, check out the Bailout Reader from the Mises Institute.

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