A Portland friend recently copied to me a letter he has submitted to the New York Times:
“Re: the blandishments of Mssrs. Paulson and Bernanke to the Senate Banking Committee, I am struck by the irony that when the s___ 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 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 have money to lend, they may be reluctant to do so out of concerns about the future market their borrower faces. Businesses may 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.
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. Congressional Democrats then managed to remove some of the worst features of Paulson’s proposal and reach a compromise with the administration. That compromise was voted down by a combination of liberal Democrats concerned that it still did too little to reward and protect ordinary taxpayers and homeowners and Republicans portraying themselves (or posturing) as defenders of Main Street against Wall Street. As of Oct. 1, its future is up in the air.
Some of the best liberal economists, including Paul Krugman, argued recently (Sept. 29) that the compromise was better than doing nothing. He suggested that there was at least anecdotal evidence that even sound businesses were having trouble getting routine financing and cited a Bloomberg article on McDonald franchises. Yet the Bloomberg piece makes the following observation: “A Bank of America loan program called ‘Eagle’ is aimed at store owners investing in the introduction of lattes, mocha and other specialty coffee … Even though McDonald’s has been a strong performer, the restaurant sector is exposed to the economic downturn, and Bank of America may think we’re not through the financial crisis yet.”
In my dream world, Democrats in Congress would take the current crisis as an opportunity to present a new bailout proposal that would insist on direct equity positions in any investment banks assisted, impose far stricter oversight than that from the financial insiders designated in the initial compromise, insist, not just suggest, that the Treasury and any firm receiving its assistance observe a moratorium on mortgages foreclosures. Finally, it would finance government assistance through a tax on securities transfers. The last item would both raise revenue and discourage the rampant speculation that helped foster the current crisis. Yes, the President and most Republicans might resist, but much of Main Street would empathize with such a package and debate over it would highlight the origins of the current crisis.
Most importantly, a good bailout would also address Main Street’s concerns more directly. Bailing out—and even restructuring—the financial system is unlikely to end the crisis. With economist Dean Baker, writing recently in The American Prospect, I share the concern that passage of a large bailout program could in fact be counterproductive because of the political appeal, not the economic logic, of deficit reduction fever. In this regard, Obama missed a golden opportunity in the first presidential debate to do some economic education. 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, and the economy does start to grow, the equity stake government takes in investment banks will have real value. 2) But most importantly, if the recession induced by Bush’s lax regulatory policies deepens, the value of government’s holdings will decrease and claims on government, such as unemployment compensation, will only grow. Obama might then point out that Bush’s deficits are the result of tax favors to the rich. They have financed luxury consumption and speculative and destructive paper chasing by the rich. Any deficit spending in which he engages will both restore growth now and address long term needs.
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, Greenspan, Bernanke and company have always prefered 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. It is our job to see that those who enable him lose theirs.
[Editor’s Note: Bernanke in 2006 was appointed to a 14-year term on the Federal Reserve Board, and a four year term as chairman.]
John Buell lives in Southwest Harbor, Maine, and writes regularly on labor and environmental issues. Email jbuell@prexar.com.
From The Progressive Populist, November 1, 2008
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