Washington, DC turned its attention to Wall Street this week after Treasury Secretary Henry M. Paulson, Jr. proposed a massive $700 billion taxpayer funded pool to buy up toxic assets that have clogged credit markets.
With businesses refusing to lend money, or extend credit to businesses and consumers, the credit grip could choke the American economy sending rippling waves throughout the United States.
The White House set forth its proposal, the Paulson Plan, late last week to provide some rational mechanism to deal with the financial crisis.
The US Congress is fulfilling its constitutional duty by crafting compromise legislation to address the problem.
Public outrage over the perception that the US government is placing Wall Street interests over and above the interests of Main Street has complicated the process.
Many Americans are confused by the financial crisis and do not understand how Wall Street has led the country down the path to financial ruin.
Of course executive and legislative recourse is meaningful only to the extent that government addresses the underlying problems that led to the financial meltdown in the first place.
Understanding the economic, financial, and political history of the current financial crisis requires historical analysis of the events and people that influenced and shaped the financial system.
Policymakers need to understand how the current financial system has not always been: in other words, that the things which seem most evident to us are always formed in the confluence of party politics, interest group lobbying, court decisions, administrative rulings, and a constitutional framework that has permitted the current economic situation to evolve.
That understanding is necessary for bailing the country out of the current fiscal, and broader economic, mess.
What Wall Street perceives as its necessity, or rather what financial institutions offer as a necessary rescue, can perfectly well be shown to have a history; and the network of circumstances from which the financial crisis has emerged can be traced. Which is not to say that the financial schemes devised by Wall Street over the past ten years are irrational.
It simply means that the current financial crisis resides on a base of financial practices and economic history; and that since these financial instruments have been made, they can be unmade, so long as we know how it is they were made.
It is necessary to examine the assumptions on which credit decisions were based and to review the regulatory structure that was to provide oversight of US financial transactions.
To that end the US government is the appropriate governing authority to examine and unravel the financial crisis.
A number of important issues remain unresolved concerning the liability of financial institutions, including tests for the aggregation, blameworthiness, and identification of corporations.
Also, the government seems reluctant to answer the question of hiding illiquid assets. For example, supposing a mortgage originator refinanced a mortgage (N) in 2003 and bundled it together with other mortgages, notes and securities in Bundle A which was then sold to Bank X,Y,Z.