I’ve been holding off on posting on the economic crisis because the massiveness of what’s happened is in many ways hard to fathom.
But listening to the news coverage today of the federal bailout plan left me shaking my head, as if the only thing that matters is the impact that the crumbling economy has on banks and investment firms.
The impact on taxpayers and the government’s unwillingness to step in and aid the thousands of homeowners who have been burned and will continue to be burned by the unscrupulous practices of the homeloan industry remain a rarely discussed aspect of this.
The plan, estimated to cost a minimum of $500 billion and as much as $1 trillion,
include buying assets only from United States financial institutions — but not hedge funds — and hiring outside advisers who would work for the Treasury, rather than creating a separate agency.
The bailout is based on the idea that the investment houses in trouble are too large and have too great a reach into our economy to be allowed to crumble under the weight of their own bad decisions.
But are they too big to fail? There is some evidence that they are — allowing them to collapse could lead to a credit crunch that could, as Paul Krugman said on The Rachel Maddow Show, stop business in its track and lead to higher unemployment.
That said, Krugman, on his blog, said he is “uneasy”:
Here’s the source of my uneasiness: the underlying premise behind the buyout seems, still, to be that this is mainly a liquidity problem. So if the government stands ready to buy securities at “fair value”, all will be well. But it’s by no means clear that this is right. On one side, the government could all too easily end up paying more than the securities are worth — and if there isn’t some kind of mechanism for capturing windfalls, this could turn into a bailout of the stockholders at taxpayer expense.
On the other side, what if large parts of the financial sector are still underwater even if the assets are sold at “fair value”? Is there a provision for recapitalizing firms so they can keep on functioning?
Not that the big banks and investment firms have been investing in American jobs or American infrastructure. As Harold Meyerson writes in The Washington Post,
During the late, lamented Wall Street boom, America’s leading investment institutions were plenty bullish on China’s economy, on exotic financial devices built atop millions of bad loans, and, above all — judging by the unprecedented amount of wealth they showered on the Street — on themselves. The last thing our financial community was bullish on was America — that is, the America where the vast majority of Americans live and work.
Over the past eight years, the U.S. economy has created just 5 million new jobs, a number that is falling daily. The median income of American households has declined. Airports, bridges and roads are decaying. Rural wind-power facilities cannot light cities because our electrical grid has not been expanded. New Orleans has not been rebuilt. And as productive activity within the United States has ceased to be the prime target of investment, household consumption — more commonly known as shopping — has come to comprise more than 70 percent of our economy.
The banks’ underinvestment in America was hardly due to a lack of capital. But even as petrodollars and China’s dollars poured into Wall Street, the investment houses directed trillions into new and ever more dubious credit instruments, which yielded massive profits for Wall Streeters and their highflying investors, and put chump change into efforts to improve, to take just one example, American transportation.
The finance-based economy, in fact, has been our biggest problem, Meyerson writes.
Finance set the terms of corporate behavior over the past quarter-century, and not in ways that bolstered the economy. By its actions — elevating shareholder value over the interests of other corporate stakeholders, focusing on short-term investments rather than patient capital, pressuring corporations to offshore jobs and cut wages and benefits — Wall Street plainly preferred to fund production abroad and consumption at home. The internal investment strategy of 100 years ago was turned on its head. Where Morgan once funneled European capital into American production, for the past decade Morgan’s successors have directed Asian capital into devices to enable Americans to take on more debt to buy Asian products.
Worse yet, as Wall Street turned its back on America, so did government. The Bush administration and congressional Republicans (John McCain among them) kept American incomes low by opposing hikes in the minimum wage; helping employers defeat unionization; and shunning policies to modernize infrastructure, make college more affordable, and boost spending on basic science and research.
Dean Baker, of the Center for Economic Policy Research, says that the federal “proposal to throw out hundreds of billions of taxpayer dollars to buy up this debt will do little if anything to prevent another round of collapsing banks” because it doesn’t address the basic issue, i.e., the broken regulatory system.
He asks,
how will we get the banks to honestly describe the assets they throw into the auction? Will we rely on the rating agencies?
Maybe the Bush crew missed this one, but a big problem in the housing bubble financial flow was the fact the rating agencies accepted many false claims by the banks and therefore rated a lot of junk as investment grade debt. Has the Bush administration figured out how it will get around this problem with its reverse auction system?
The Democratic leadership in the House and Senate, according to The New York Times, want the plan also “to provide relief to millions of families that were poised to lose their homes to foreclosure.”
Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said the plan would have to include requirements that the government reduce the loan amounts or improve the terms for many distressed borrowers.
“We should be more willing to write down the mortgages,” Mr. Frank said in a telephone interview on Friday. “We’ll become the lender. The government will wind up in a controlling position so that we can reduce the number of foreclosures.”
That would make some sense, but you can already hear the conservatives crying that there just isn’t enough cash to make this happen. So, to sum up: We have up to $1 trillion for the investment industry, but exactly what for the rest of us. Nice.
Hank Kalet 