Apparently, Monday’s upward spike in the stock market was nothing more than a blip. After a record increase — it surged 936 points on Monday — the Dow Jones Industrial average fell by almost 80 points Tuesday and cratered today, dropping 733 points.
The reason, according analysts quoted by The New York Times, is that
the market was continuing to react to the same fundamental factors that drove it lower in the morning, including weakness in the manufacturing sector, the large drop in retail sales and the growing realization that there will be no quick fix to the credit
crisis.
The stock selloff occurs just a day after the federal government agreed to buy into American banks to prop them up, essentially nationalizing them. Though the nationalization plan, as Robert Weissman of Essential Action wrote in Common Dreams, “the government may be obtaining a modest ownership stake in the banks, but no control over their operations.”
In keeping with the terms of the $700 billion bailout legislation, under which the bank share purchase plan is being carried out, the Treasury Department has announced guidelines for executive compensation for participating banks. These are laughable. The most important rule prohibits incentive compensation arrangements that “encourage unnecessary and excessive risks that threaten the value of the financial institution.” Gosh, do we need to throw $250 billion at the banks to persuade executives not to adopt incentive schemes that threaten their own institutions?
The banks reportedly will not be able to increase dividends, but will be able to maintain them at current levels. Really? The banks are bleeding hundreds of billions of dollars — with more to come — and they are taking money out to pay shareholders? The banks are not obligated to lend with the money they are getting. The banks are not obligated to re-negotiate mortgage terms with borrowers — even though a staggering one in six homeowners owe more than the value of their homes.
“The government’s role will be limited and temporary,” President Bush said in announcing today’s package. “These measures are not intended to take over the free market, but to preserve it.”
That may not be enough. The role of the financial sector in our economy has grown beyond what can be described as healthy, reaching dizzying and dangerous levels. Kevin Phillips, author of “Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism,” says the reliance on the financial sector offers a “chilling parallel with the failures of the old powers.”
In the 18th century, the Dutch thought they could replace their declining industry and physical commerce with grand money-lending schemes to foreign nations and princes. But a series of crashes and bankruptcies in the 1760s and 1770s crippled Holland’s economy. In the early 1900s, one apprehensive minister argued that Britain could not thrive as a “hoarder of invested securities” because “banking is not the creator of our prosperity but the creation of it.” By the late 1940s, the debt loads of two world wars proved the point, and British global economic leadership became history.
In the United States, the financial services sector passed manufacturing as a component of the GDP in the mid-1990s. But market enthusiasm seems to have blocked any debate over this worrying change: In the 1970s, manufacturing occupied 25 percent of GDP and financial services just 12 percent, but by 2003-06, finance enjoyed 20-21 percent, and manufacturing had shriveled to 12 percent.
The downside is that the final four or five percentage points of financial-sector GDP expansion in the 1990s and 2000s involved mischief and self-dealing: the exotic mortgage boom, the reckless bundling of loans into securities and other innovations better left to casinos. Run-amok credit was the lubricant. Between 1987 and 2007, total debt in the United States jumped from $11 trillion to $48 trillion, and private financial-sector debt led the great binge.
Washington looked kindly on the financial sector throughout the 1980s and 1990s, providing it with endless liquidity flows and bailouts. Inexcusably, movers and shakers such as Greenspan, former treasury secretary Robert Rubin and the current secretary, Henry Paulson, refused to regulate the industry. All seemed to welcome asset bubbles; they may have figured the finance industry to be the new dominant sector of economic evolution, much as industry had replaced agriculture in the late 19th century. But who seriously expects the next great economic power — China, India, Brazil — to have a GDP dominated by finance?
With the help of the overgrown U.S. financial sector, the United States of 2008 is the world’s leading debtor, has by far the largest current-account deficit and is the leading importer, at great expense, of both manufactured goods and oil. The potential damage if the world soon undergoes the greatest financial crisis since the 1930s is incalculable. The loss of global economic leadership that overtook Britain and Holland seems to be looming on our own horizon.
He wrote this in the spring as it appeared that the teetering economy was stabilizing, well before the current implosion, making him seem a bit clairvoyant.
But he has been banging this drum for a while, along with William Greider and others.
But diagnosing the crisis is only part of what we have to consider. The question is where we go from here. First, we should revamp the Paulson plan so that buying shares in the banks gives the federal government a voting interest.
More importantly, we need to invest heavily in the American people, as Howard Zinn, the radical progressive historian, suggests in The Nation. He says we should
take that huge sum of money, $700 billion, and give it directly to the people who need it. Let the government declare a moratorium on foreclosures and help homeowners pay off their mortgages. Create a federal jobs program to guarantee work to people who want and need jobs.
We have a historic and successful precedent. The government in the early days of the New Deal put millions of people to work rebuilding the nation’s infrastructure. Hundreds of thousands of young people, instead of joining the army to escape poverty, joined the Civil Conservation Corps, which built bridges and highways, cleaned up harbors and rivers. Thousands of artists, musicians and writers were employed by the WPA’s arts programs to paint murals, produce plays, write symphonies. The New Deal (defying the cries of “socialism”) established Social Security, which, along with the GI Bill, became a model for what government could do to help its people.
That can be carried further, with “health security”–free healthcare for all, administered by the government, paid for from our Treasury, bypassing the insurance companies and the other privateers of the health industry. All that will take more than $700 billion. But the money is there: in the $600 billion for the military budget, once we decide we will not be a warmaking nation anymore, and in the bloated bank accounts of the superrich, once we bring them down to ordinary-rich size by taxing vigorously their income and their wealth.
Don’t expect these proposals — at least not yet. Barack Obama has hinted at a public-works-based stimulus, but a small one. Like Sen. John McCain — whose economic plan appears to consist solely of cutting the cabe cutting capital gains tax — Sen. Obama has offered unfortunately narrow economic proposals.
That said, Franklin Delano Roosevelt did not run on the New Deal, but moved quickly in that direction as it became clear he had no choice. Maybe, Sen. Obama will follow that example if he is elected.
Hank Kalet 