Look, I understand why everyone is upset about the financial system rescue plan. The version presented to the Congress is, according to my most trusted source (Nouriel Roubini) wrongheaded; a disgrace. And we all would love to punish someone for the fact that we now have to deal with the effects of more than a quarter century of deregulation of the financial system. Even Bill Clinton participated in the dismantling of the protections put in place after the great crash of 1929; it is very hard to find everyone who needs to be punished, herd them into a single corral, and decide which to shoot and which to use the electric prods and stun guns on.
And I understand why each of us, and each liberal and progressive interest and pressure group, might think this is the time to press for advantage - to bring forward the major social and political changes we have long advocated which may have some relevance to the present crisis, and use this occasion, when the old system is in shock and distress, to achieve our worthy goals.
But I think that we must consider the consequences of letting these impulses of self interest and self justification determine our actions and our advocacy at this time of crisis. For I do believe that the crisis is real, that the present financial system world wide is threatened, and that if it were to shut down for any length of time the consequences for our nation and the world, in our time and our children's could be severe - perhaps irreparable.
I remember Naomi Klein's admonition that the Right invented the Shock Doctrine, not liberals. The Right holds values that are congenial to the application of the Shock Doctrine to social change at times of social stress, not progressives. The Right has decades of experience in turning times of confusion and discontent into newly repressive policies which deprive the disadvantaged and advantage the privileged, suppress the oppressed and exalt the powerful - we have decades of experience in watching that happen. Yet we let ourselves believe that encouraging chaos and social stress through a disorderly, chaotic, process of protest can further our desires for a better, more just, more tolerant, and more compassionate world.
I approach my 70th year. Perhaps I am hearing noises in the night that are not really there. But I do not, cannot, believe that protest against a rescue of a financial system which is on the verge of collapse can bring anything but evil. Such a collapse will advantage and further the values and goals of the Right, not of civilization. The retrograde consciousness which believes "cosmopolitan" is a nasty word will advance its narrowness and intolerance further into the public mind, and into public policy. This is the way humans deal with sudden onslaughts of fear, uncertainty, and doubt. We turn inward, suspect the outside world, demand conformity within our own, and reject the values of the apparently too open and generous social arrangements which seem to have failed us. It takes decades, sometimes centuries, of peace, prosperity, comity, and stability before openness again becomes tolerable within such a closed social order. In truth it is this squalling, foot stamping, fist throwing reaction to deprivation, to the onset of hard times, that destroys civilizations and creates holocausts.
For this reason I will not permit myself to be a part of any action or advocacy which has a substantial risk of bringing the effective operation of even the present, dysfunctional world financial system to a halt. There is a better way to do it. There are better ways in which to conduct ourselves.
Here is what I think, and what I propose we should do.
Our people, and our representatives think the financial system rescue plan is about protecting financial institutions from failure resulting from bad judgment about mortgage backed securities.
It is actually about protecting the worldwide supply of money and credit from collapse. This collapse would follow financial "deleveraging" which results from the vanishing value of highly leveraged collateralized debt obligations (CDO) and credit default swaps (CDS) built up out of mortgages and other debt instruments.
These have become, under the market fundamentalist mandated financial deregulation regime, the source and underpinning of the world's money supply. If they collapse in value the money supply will collapse along with them. The money supply will then have to be re-created by central banks and governments. Doing that will require addressing enormously difficult political and distributional issues.
Delay in restoring the money supply will kill economic activity, and throw the world economy back 20 to 30 years, I suspect. People will become homeless, illness will go untreated, starvation will become common, and civil unrest and warfare even more common.
Absent an effective "rescue" package, the sooner the (money) printing presses roll, the better.
Don't get me wrong: Even if we get a rescue package passed, and avoid a collapse of the world economy and money supply, it will not fix everything...
Our current credit crisis is likely to deepen and spread, but in a more "regulated" and less damaging way. Many more (between 200 and 300) major banks will fail, according to more than one student of the banking system. The economy will sink into a severe recession, lasting 12 to 18 months, possibly more. But we have to compare this to the possible multiple year contraction that might result from collapse of the money supply.
For many years the market has valued stocks well above their 'natural" price/earnings ration of 16:1. Vulnerable investments will suffer some of the greatest losses in modern times and average returns on stocks will likely retreat toward the historical norm.
Housing prices will likely decrease, and rentals increase, until the ratio of the two returns to its 400 year average, 100:1 (one month's rent x 100 = property value; eg. $4300/month x 100 months = $430,000 property value). That's one quarter the value of the property, or four times the rental cost, in the ratio which has held in some markets in recent years.
But avoiding these unpleasant realities is not what the rescue is about. It is about avoiding a much worse scenario, resulting from a collapse of the world's money supply and a dramatic shrinking of worldwide trade and economic activity.
And yes, of course the financial deregulation was absurd, the central banks should never have let the money supply become dependent upon debt instruments instead of real production and economic activity, and the system has for too many years rewarded impetuous, reckless, and irresponsible risk takers instead of hard working laborers and farmers and business owners. Many Americans are tired of watching the money earned from agriculture and industry run, like water in rivers, from the center of the country to financial centers on the coasts.
But that's not really the point, just now, is it? We are trying to avoid a disaster just now, and have to deal with the "financial genius" crazies later.
Even Critics Agree: The crisis is real; so is the need for action
Some have argued that there is no crisis. Some have used a letter signed by a whole bunch of econ professors, which criticizes the Paulson plan for financial system rescue to argue that the crisis is an imaginary thing, ginned up to support "bailing out" rich evildoers.
That "letter was sent to Congress on Wed Sept 24 2008 regarding the Treasury plan as outlined on that date. It does not reflect all signatories views on subsequent plans or modifications of the bill".
My own favorite student of this topic opposes the Paulson debt purchase plan. But he goes on to say, very clearly:
"Whenever there is a systemic banking crisis there is a need to recapitalize the banking/financial system to avoid an excessive and destructive credit contraction."
I agree with Dr. Nouriel Roubini in that.
Yes, something does needs to be done. Two essentials described by Dr. Roubini: