Don't just do something, stand there!!
Chicken Little rules on Wall Street and Washington this week, but while Bernanke, Paulson, Bush et alia, try a "sky is falling" bumrush to an unregulated bailout of the world's richest financial institutions, cooler heads are asking what eggzackly would help calm these troubled market waters. Surely with out-of-control borrowing at the heart of the matter, $700 billion to more than $1 trillion (the figures bandied about by bailout proponents) more national borrowing can't be the answer to this crisis? Can it?
Supporters of the bailout are following a basic sympathetic but extortionist rationale:
We know it sucks to save these guys who, because of ill-advised deregulation beginning in the Clinton administration (and backed fervently by congressional Republicans at the time), have made irrational bets on the market and now seek to have taxpayers assume the risk that is properly their own. But the entire house of cards which is American capitalism is likely to tumble down on top of everyone if we don't unravel this mess. At that point, with the housing crisis accelerating and most folks' retirement accounts collapsing, standing on free-market principle would be cold comfort indeed.
The danger in the rush to respond of course, beyond the obvious anti-democratic notions in the subtext of the Paulson proposal and the loathesome surrender of taxpayer resources to Wall Street miscreants, is that the plan could do more harm than good over both the short and the long term. The president is speaking tonight to urge the public to lean on their congressional reps to do something and fast, but I think precisely the opposite may be called for here, a week or so cooling-off period to allow legislators and policy analysts to get their bearings, allow the market conditions to become a little clearer, and encourage a more judicious appraisal of the best way forward.
That may mean accepting Paulson's plan, a plan that will leave the treasury with perhaps $1 trillion less over the coming years to be invested in the nation's crumbling schools, infrastructure, and health care systems—a brutal sacrifice to be made on behalf of investment banks and market stability to say the least. (The National Priorities Project has already broken out some of those sacrifices .) Or it could mean allowing the space for a different proposal to emerge. Lawrence White, economics professor at NYU's Stern School says some basic adjustments to Paulson's plan would at least better protect taxpayer interests.
Already some analysts are talking of adapting the Swedish model (Here's an interesting discussion of same) or the "Japanese solution" rather than the basic rollover to Wall Street envisionied in the current proposal.
One voice of reason? Perhaps not such a surprise, it's Republican candidate Ron Paul.
Whatever the outcome of current deliberations, one can only hope that Congress will rediscover an appreciation for regulatory powers. Here are some observations from a commentary written on the occassion of the 1999 repeal of the Glass-Steagall Act of 1933:
The proposed deregulation will increase the degree of monopolization in finance and worsen the position of consumers in relation to creditors. Even more significant is its impact on the overall stability of US and world capitalism. The bill ties the banking system and the insurance industry even more directly to the volatile US stock market, virtually guaranteeing that any significant plunge on Wall Street will have an immediate and catastrophic impact throughout the US financial system.