May 28, 2024
Column

Bailout not the end of the crisis

A Portland friend recently sent me a letter he has submitted to The New York Times: “Re: the blandishments of Messrs. Paulson and Bernanke to the Senate Banking Committee, I am struck by the irony that when the [expletive] hits the fan in the financial markets, we are all Keynesians.” He means, of course, that when the big financial houses face bankruptcy, free market principles are suspended. Government subsidizes investment banks – ostensibly to prevent collapse of the overall economy but in fact to save their hides.

I prefer a term my late senior colleague, Sidney Lens of The Progressive coined, “socialism for the rich.” Today we would be better off if we repudiated socialism for the rich and considered the full range of remedies that John Maynard Keynes, an ardent capitalist, offered in the ’30s.

Keynes recognized that during severe economic downturns, monetary policy (i.e. Fed interest rates, pumping liquidity into banks, etc.) was not enough. Even if banks were willing to lend and interest rates were low, businesses would not borrow for expansion in slowing markets.

Government must stimulate goods and service production. It can pay for roads, public transit, schools, and medical services. New hires spend on other businesses. More citizens buy or rent housing, wages increase. Fewer mortgages become delinquent, so banks can lend more.

Treasury Secretary Henry Paulson’s original proposal would allow public purchase of junk not only from failing firms but also from those who would thrive anyway, a windfall to investment bankers. Nor would it have given the public anything in return for taking these risks.

Given the paralysis in credit markets, growing by the day, the current compromise is probably better than doing nothing. Though as I write, details are sketchy, it does gives Congress some opportunity to cease funding, though the new oversight board consists primarily of financial insiders. Requiring a public equity stake in firms government assists will compensate taxpayers for risks and keep healthy firms from gaming the public. Nonetheless, how much stake the public gains is unclear.

Language on mortgage relief is not binding. Many mortgage holders have been misled by banks and egged on by the Fed’s glowing predictions of ever- rising home prices. They are at least as deserving of assistance – for both moral and economic reasons – as investment bankers.

This bailout, even if more fairly crafted, does not represent the end of the crisis. Barack Obama missed a golden opportunity in Friday’s debate. Under persistent hectoring from Jim Lehrer as to whether debt incurred from this bailout would preclude his ambitious agenda, he should have said that 1) If the bailout were done properly, with better banking regulation, it could be written off as a one-time expense, and 2) that as the recession induced by Bush’s lax regulatory policies and inequitable taxes deepens, it will be all the more necessary to embark on job creation initiatives.

Bush’s deficits have financed luxury consumption and speculative paper chasing by the rich. Obama’s planned expenditures could be funded in part by taxes on the inordinate wealth accrued by this destructive economy and a modest increase in the deficit.

Unlike the whole series of recent Fed interventions, this summer’s fiscal stimulus package did produce a modest GNP bounce. Had this package been larger and emphasized the unemployed, countercyclical funds for state governments, infrastructure, conservation, and alternative energy, it would have boosted employment even more and laid the foundation of long-term prosperity. Once upon a time, sensible families, corporations, and governments went into debt only for such purposes.

Paulson, Alan Greenspan and company prefer monetary policy. It is more insulated from democratic control than taxation and spending decisions. (Military spending, which is also partially cordoned off from democratic accountability, is the one fiscal intervention conservatives love. And it grows from and contributes to a perception of emergency used to intensify a crisis mentality and curb democracy.)

Investment bankers, claiming any political intervention destabilizes financial markets, demand that the Fed remain neutral. Yet the Fed always has some agenda, progressive critics of the Fed, including some who foresaw and proposed steps to combat the hosing bubble, could hardly have made a worse mess of our markets Ben Bernanke, the key advocate of Paulson’s atrocious plan, will not lose his job regardless of who wins in November.

John Buell is a political economist who lives in Southwest Harbor. Readers may contact him at jbuell@acadia.net.


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