This article was first written September 24, 2008 for http://progressivesforobama.net
"Washington can act with breathtaking urgency when the right people want something done. In this case, the people are the Wall Street titans, who are scared witless at the prospect of their enormous implosion. Congress quickly agreed to enact a gargantuan bailout, with more to come, to calm the anxieties and halt the deflation of the Wall Street giants. Put aside partisan bickering, no time for hearings, no need to think through the deeper implications. We haven't seen "bipartisan cooperation" like this since Washington decided to invade Iraq."
So wrote William Greider in The Nation last month [August 18/25]. But a week ago it looked as if there weren't going to be any more bailouts. Secretary of the Treasury Henry Paulson refused to intervene to save the ailing investment bank, Lehman Brothers, which promptly declared bankruptcy--and sent the Dow plummeting. Credit markets began to freeze up. Paulson and Federal Reserve Chairman Ben Bernanke reconsidered. On Monday Paulson proposed a $700 billion rescue plan for the U.S. financial system--a plan involving more money than any single government program in history, more money even than we've spent thus far on the Iraq debacle--and he wants it approved right away, within the week, before Congress adjourns to prepare for the election.
One can't but think of Naomi Klein's "Shock Doctrine"--the propensity of neoliberals to push through their radical-restructuring programs when the recipients are too stunned by cataclysmic events (military coup in Chile, collapse of the Soviet Union, shock and awe in Iraq, Hurricane Katrina, etc.) to realize what's happening.
But there's a difference. Henry Paulson, formerly with Goldman Sachs, one of the two major Wall Street investment banks still standing (although neither it or Morgan Stanley is as independent as it was before Monday, when both agreed to more regulation in return for possible support) does not have a neat package of reforms, carefully crafted by the Chicago boys and other free-marketeers, to push through an ideological agenda. As everyone now realizes, it is precisely that neoliberal agenda--privatize, deregulate, let the markets rip--that has created this colossal mess. There is no Ronald Reagan out there urging that we "get government off our backs." Are you kidding? The Wall Street wizards are begging the government to intervene. "Please, please, don't let us go under like Lehman Brothers!" They just want to be sure that the intervention is done the "right way"--so that they may keep their wealth and power, or, if they have to cede some for awhile, to be sure that they can get it all back in short order.
Why the rush? It's obvious, isn't it? The looming financial meltdown threatens to raise deep questions about our current financial system, embarrassing questions, questions threatening to a sector of the economy that has generated fantastic profits for its own in recent years, fantastic payouts to the wizards who have been running the financial show, wizards who have gotten us into a terrible mess. (In the 1970s profits from the financial sector accounted for less than 10% of all corporate profits. The figure is now 30%, profits made, not by growing anything or manufacturing anything or selling material goods, or providing such tangible services as health care or auto repair, but by buying and selling "pieces of paper,"- i.e., ownership claims, debt obligations and their derivatives.) The wizards want to get a plan in place quick, before these questions are asked.
William Greider calls the Paulson plan "a historical swindle" [The Nation, 9/19]. Princeton economist and regular New York Times columnist Paul Krugman calls it "cash for trash." [NYT 9/22]:
Mr. Paulson insists that he wants a "clean" plan. "Clean," in this context, means a taxpayer-financed bailout with no strings attached--no quid pro quo on the part of those being bailed out... Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review "by any court of law or administrative agency," and this adds up to an unacceptable proposal.
Both Greider and Krugman offer the same advice to Congress. "Stop, take a deep breath and examine what you are being told by so-called 'responsible opinion,'" says Greider. "Pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it address the real problem." says Krugman.
But what is "the real problem"? Krugman thinks it's the fact that the financial losses due to the bursting of the housing bubble have left financial institutions with too little capital. Credit markets are getting tight. If businesses (and potential home buyers) can't borrow, then we're in for a serious recession.
Let's step back for a moment and think more carefully about "the real problem." It is worth noting than neither William Greider nor Paul Krugman, nor Joseph Stiglitz ["How to Prevent the Next Wall Street Crisis" CNN.com, 9/17/08] nor Thomas Palley ["The Liquidation Trap," thomaspalley.com, 9/17/08] nor any other major left-liberal economist thinks that the government should stand by and let these big financial institutions go under. All are concerned with some quid pro quo, and with some reforms to prevent this sort of crisis from occurring again, but none oppose a bailout now.
Why is that? Isn't this an ethical matter? Is it right for the Federal government to intervene, putting taxpayers' dollars at risk, to save a company from bankruptcy, particularly when the bankruptcy is due to the company taking on risks that it should have known were severe? (These guys are supposed to be very smart, after all, and are exceedingly, exceedingly well paid.) The government never intervenes when a small business fails, or when a consumer runs up a credit card debt he cannot pay. The government is certainly in no hurry to help out the poor fools suckered by teaser loans who now face home foreclosures.
We all know the rationale, don't we? Certain companies are "too big to fail." We can't risk panicking the financial markets. Stock values would plunge. Hundreds of billions of dollars might be lost--far more than the "bailout" would cost. (That was the rationale for the Bear Sterns bailout last spring, which cost $30b. Paulson tried to get tough with Lehman Brothers, and the Dow Jones dropped 500 points the next day.)
But this raises a deeper question. So what if the stock market plunges? Stock certificates are just pieces of paper, mostly owned by the rich. No one forced these people to buy them. They knew they were taking a risk. They gambled and lost. Isn't that what capitalism is all about? You take risks. You can win big--very, very big, as we've seen in recent years. But you can also lose. Isn't that the justification for those very big gains--that the risks are large.
There's an obvious rejoinder to this line of reasoning. It's not only the rich who will be hurt. There are millions of ordinary people who are invested in the stock markets, most often via intermediary agencies. For millions our pensions are so invested. So a stock market crash will affect us as well. Surely it's worth a few billion dollars to preserve millions of pensions.
There's a deeper reason still why the government cannot sit by and let the financial markets implode. The health of a capitalist economy depends on what Keynes called the "animal spirits" of investors. A healthy capitalism requires a steady stream of real investment flowing into the economy. This keeps the construction industry busy, the machine tool industry busy, and all those other industries producing the things businesses need to expand. But investors won't invest if it doesn't appear profitable to do so. And they can't be forced to invest. It's their money, after all. But notice--if they don't invest--or if they decide to invest outside the country instead--then workers start getting laid off. And when workers lose their jobs, they buy less--which means the companies producing the products these workers would buy must also cut back, laying off their workers. Etc. The familiar downward spiral. The economy slides into recession--or worse.