Like those offered before the invasion of Iraq, the Administration's official cost estimates are unreliable. Some observers, like Daniel Alpert of Westwood Capital, argue that "when you add up all the problems in the residential housing market still to come -- further erosion of housing prices, mortgage foreclosures and so on -- we are going to need another $1 trillion of write-downs."
Uncertainty is even greater on Wall Street today than in Iraq five years ago. Questioning "What's All This Stuff Worth?", The New York Times explained that the bailout involves "troubled investments that even Wall Street is struggling to put a price on." Debt portfolio manager Andrew Feltus suggests the price taxpayers pay "might be 20 cents on the dollar or 60 cents on the dollar, but we won't know for years."
Under these conditions, absurd notions that taxpayers might conceivably profit from the bailout are naive.
Beyond its uncertainty, the Administration also appears as disingenuous as it did on Iraq. Five years ago, officials cried wolf about weapons of mass destruction that were never found. Over the last week, many of the same people raised alarms about an all-too-real financial crisis, but then proposed a plan that would have lined Wall Street pockets, advancing the crony capitalism favored by the Administration elsewhere.
Its very willingness to even recognize the crisis underscores the Administration's lack of credibility: "Compare their dire proclamations with their outright refusal to even entertain the notion of a recession as little as seven months ago." At least one economist has confessed a "sneaking suspicion...that they started [the current crisis] with a determination to throw money at the financial industry, and everything else is just an excuse." Economists concur even across the political spectrum: Allan Meltzer, a monetary policy expert at Carnegie Mellon and former economic adviser to President Reagan, characterized the Administration's rhetoric as "scare tactics to try to do something that's in the private but not the public interest. It's terrible."
Finally, there is the audacious hypocrisy of "people who have spent their careers arguing that government is in the way of progress -- that its role must be pared to allow market forces to flourish -- [now] calling for the biggest government bailout in American history." The "revolt" within the GOP House caucus that blocked the bailout on Monday was prompted by outrage over precisely this double standard. Rep. Ron Paul (R-TX) confessed, "I don't know who the conservatives are and who the liberals are."
Like the occupation of Iraq, the bailout plan forces the American people to pay for the Administration's errors, in order to place a band-aid on a doomed financial system whose failure is now inevitable.
A Drop in a Bucket...
Our nation has already fallen off a financial cliff. According to Roger Kubarych, former chief economist at the New York Stock Exchange, "Historic events over the past two months have fundamentally changed the US financial landscape, and additional shocks to the system are likely....[B]old action didn't calm financial markets, far from it." In fact, "[t]he bailout discussions came on a day when the Federal Reserve poured almost $300 billion into global credit markets and barely put a dent in the level of alarm."
Krugman (the scholar of economic crises) predicts that the Paulson plan would fail to achieve even its core aims, even setting aside the various economic problems that lie well beyond its scope. "[I]t might -- might -- break the vicious circle of deleveraging....[but e]ven that isn't clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure."
Moreover, the plan addresses only one of several structural problems pervading the financial system. "Even if it works, the system will remain badly undercapitalized. ....[T]here will be $800 billion or more of real...losses on home mortgages. Only around $480 billion have been acknowledged by financial institutions so far. So even if the fire-sale discount is removed, we'll still have a crippled system. And Paulson is offering nothing to fix that...."
Finally, Paulson's earlier efforts to limit the crisis may have made it even worse. Describing it as a "Hail Mary pass," business journalist Joe Nocera observes that "[t]he rescue of A.I.G. further undermined confidence because....[it] suggested the Treasury Department was as confused about what to do as the rest of us. So rather than help solve the crisis, the Treasury Department has actually contributed to the biggest problem...an utter lack of confidence." The AIG bailout also reflected conflicts of interest that further undermine Paulson's credibility.
...With a Hole at the Bottom
Recall that the "bad loans" from which Paulson proposed to rescue banks are mortgages on which homeowners will likely default. The bailout plan does nothing to address the underlying reasons why people are having trouble paying their mortgages. It also does nothing to stop banks from pursuing the same -- often predatory -- practices that got the economy into this mess in the first place.
The crisis prompting the bailout remains the tip of an iceberg, as faults pervading the economy stretch well beyond the financial system. Put simply, "[t]he U.S. consumer is under stress. The unemployment rate has climbed above 6% and anxiety about job stability is high....Wage gains are barely keeping up with inflation. Housing prices are still falling...." Even without the current crisis in the credit sector, consumer spending -- the "main engine" for economic growth -- would continue to weaken. At bottom, several fundamental weaknesses threaten the U.S. economy.
Fist, and most important, unemployment is "soaring" across the nation, even in geographic areas and industrial sectors that were recently robust, like Silicon Valley and the tech industry. Moreover, joblessness is even more troubling than it might seem, since official statistics systematically understate the extent of real unemployment by excluding three large groups of workers: part-time workers seeking full-time work; workers employed in jobs that fail to leverage or reward their training; and discouraged applicants who have stopped seeking work.
Household debt has also reached unsustainable levels. The household savings rate dropped from over 10% of disposable income, in the 1980s, to a record low of 1% earlier this decade. At the same time, household debt has risen, from "roughly 65% of disposable income in the early 1980s, to 80% in the early 1990s, to 95% in 2000...." Earlier this year, BusinessWeek exclaimed that household debt has gone "through the roof," amounting to "almost $14 trillion, nearly equal to the annual output of the U.S. economy." The combined debt of households and the federal government now amounts to over $23 trillion, or 168% of GDP, "far higher even than in the brief spike during World War II."
Working families suffer declining purchasing power for other reasons, too. The credit crunch emerging in the wake of the crisis is "further crimping budgets and family spending" by restricting access to capital. Despite various "indirect subsidies," over 40 million Americans lack health insurance, which not only adds further uncertainty and depresses spending, but also the foremost catalyst of bankruptcy. The healthcare and credit crises find further fuel in the rising costs of higher education, as well as worker-management pay differentials that have grown a hundred-fold over the last generation. Put simply, Americans make less money than we used to, yet we (sometimes by necessity, but more often by choice) spend more.
