There was a time when Americans made things. People from Central Jersey still can remember the massive slogan on the Trenton bridge crossing the Delaware River on Business Route 1:
Trenton Makes The World Takes.
Installed during the 1930s, the sign could be said to have been the motto of every small to midsize city in the country for much of the last century — not only New Jersey cities like New Brunswick and Phillipsburg, but urban manufacturing centers like Youngstown, Ohio, and Gary, Ind.
That was during another time. Over the last three decades, as the writer Kevin Phillips pointed out to Bill Moyers on Friday, on Bill Moyers’ Journal, the nation’s manufacturing base, which had driven the economy, has atrophied. In its place, he says, you have a financial sector that has “hijacked the economy.” The rapid growth in the financial sector, combined with its political power and ties to the political establishment of both parties meant that it has come to control the political agenda.
This has been going on since the beginning of the 1980s. Finance has been preferred as the sector that got government support. Manufacturing slides, nobody helps. Finance has a problem, Federal Reserve to the rescue. Treasury to the rescue. Subsidies this, that, and other.
So bit by bit, they got bigger.
And as the industry has gotten bigger, its hold on political power has grown — with friends in high places like Federal Reserve Chairman Alan Greenspan and the various treasury secretaries who have served since the 1980s, including Bob Rubin under President Bill Clinton.
And as it has gotten bigger with its tentacles reaching deeper into the national economy, the sector’s health has become conflated with the health of the overall economy — which is where Treasury Secretary Henry Paulson’s bailout plan comes in.
Paulson, speaking at a Senate hearing on Tuesday, said that the proposal he announced last week was designed to “stabilize our financial system” to “avoid a continuing series of financial institution failures and frozen credit markets that threaten American families’ financial well-being, the viability of businesses both small and large, and the very health of our economy.”
He described his plan as a
a program to remove troubled assets from the system. This troubled asset relief program has to be properly designed for immediate implementation and be sufficiently large to have maximum impact and restore market confidence. It must also protect the taxpayer to the maximum extent possible, and include provisions that ensure transparency and oversight while also ensuring the program can be implemented quickly and run effectively.
The market turmoil we are experiencing today poses great risk to U.S. taxpayers. When the financial system doesn’t work as it should, Americans’ personal savings, and the ability of consumers and businesses to finance spending, investment and job creation are threatened.
The ultimate taxpayer protection will be the market stability provided as we remove the troubled assets from our financial system. I am convinced that this bold approach will cost American families far less than the alternative a continuing series of financial institution failures and frozen credit markets unable to fund everyday needs and economic expansion.
For Paulson, speed is of the essence. He said Congress needed
to enact this bill quickly and cleanly, and avoid slowing it down with other provisions that are unrelated or don’t have broad support. This troubled asset purchase program on its own is the single most effective thing we can do to help homeowners, the American people and stimulate our economy.
But is it? Senators on the Senate Banking Committee were not so sanguine about the possibility of handing over nearly a trillion dollars to the financiers who drove the bus off the cliff, especially when many of the CEOs of the failing banks and investment firms were walking away with juicy compensation packages as the people they lent money to were being asked to leave their homes.
Sen. Jim Bunning, a Kentucky Republican, called the plan “financial socialism” because it would “take Wall Street’s pain and spread it to the taxpayers.”
And Sen. Chris Dodd, D-Conn.,
called the crisis “entirely foreseeable and preventable, not an act of God,” and said that it angered him to think about “the authors of this calamity” walking away with the usual golden parachutes while taxpayers pick up the bill.
“There is no second act on this,” Mr. Dodd said, acknowledging that speed was important. But it is more important, he said, “to get it right.”
Matt Rothschild, editor of The Progressive (disclosure: I write for Matt through the Progressive Media Project), called the bailouts “socialism for Wall Street.” The bailouts of AIG, Bear Stearns, Fannie Mae and Freddie Mac will not “help the people who are hurting in this country, especially the people who are being foreclosed upon.”
For less money, Washington could have backed their mortgages and let them stay in their homes. It could have marked the mortgages down by 25% or so, since the homes were overvalued. But this would have made it easier for people to make their payments, and the government also could have frozen the increase in the subprime rates that were killing the homeowners.
Since the housing sector was at the epicenter of the financial crisis, the government’s backing of individual mortgages could have lent some stability to the industry, and put an orderly floor on the deflation. This could have stanched some of the bleeding at the investment firms that had recklessly bet on the housing market, as well.
But rather than put the individuals first, the government has put Wall Street first.
And that’s socialism for the greediest, not the neediest.
Gretchen Morgenson, a business writer for The New York Times, was just as critical during an interview on Friday’s Bill Moyers’ Journal:
The ugly thing about this is this is privatizing gains and socializing losses. So when things are going well, the managements make out, the shareholders make out, the counterparties are fine. All the private sector people do well. But when something goes wrong, when decisions are made that turn out to be bad decisions, the U.S. taxpayer has to take on the problem.
And there’s something very wrong about that. Because all of those people that made all that money are running off here into the distance with the money, carrying it in
their bags. And the United States taxpayer is on the hook.
This is reason enough to slow down. Bob Herbert, writing in The New York Times, acknowledges that “the system came perilously close to collapse last week and needs to be stabilized as quickly as possible.”
But we don’t know yet that King Henry’s fiat, his $700 billion solution, is the best solution. Like the complex mortgage-based instruments at the heart of this debacle, nobody has a real grasp yet of the vast implications of Mr. Paulson’s remedy.
Experts need some reasonable amount of time — I’m talking about days, not weeks — to home in on the weak points, the loopholes, the potential unintended consequences of a bailout of this magnitude.
The patchwork modifications being offered by Democrats in Congress are insufficient. Reasonable estimates need to be made of the toll to be taken on taxpayers. Reasonable alternatives need to be heard.
And they need to be heard precisely “because the people who have been running the economy for so long — who have ruined it — cannot be expected to make things right again in 48 or 96 hours.”
Mr. Paulson himself was telling us during the summer that the economy was sound, that its long-term fundamentals were “strong,” that growth would rebound by the end of the year, when most of the slump in housing prices would be over.
He has been wrong every step of the way, right up until early last week, about the severity of the economic crisis. As for President Bush, the less said the better.
The free-market madmen who treated the American economy like a giant casino have had their day. It’s time to drag them away from the tables and into the sunlight of reality.
And they should be made to pay. In the end, any bailout package has to be structured to protect taxpayers and homeowners and not reward companies and CEOs who made bad bets — as Dean Baker wrote earlier today.
The bailout has to be painful, it is not supposed to be a reward for ridiculously overpaid executives who pushed their companies to the edge of bankruptcy. If the government’s purchases of bad debt were tied to serious restrictions on executive compensation and the forced sale of equity to the government, then only banks that really needed the money would line up for the bailout. Under these terms, we could include whatever assets the Wall Street boys and girls want to sell.
I want to go back the Trenton Makes bridge and our history as a manufacturing nation for a second. The textiles, iron works, furniture, automobiles and other goods produced by American workers in the past were a tangible product of the money invested by the financial industry. What has happened to our economy is that we have replaced our productive investments with what many commentators have called an elaborate pyramid scheme in which money is moved from account to account, increasing in value without creating anything productive.
Once the foundation of the pyramid is exposed as a fake, the entire thing comes crumbling down. My fear is that’s what’s happening, that there is little we do will prevent the collapse and the best we can hope for is to craft measures to make it as painless as possible.
Hank Kalet 