Thursday, October 02, 2008

An Ordinary Person's View of the Bailout

The Mess We Are In

I am not an economist nor do I claim to be an expert on finance and economic matters. I am, however, an ordinary citizen, a voter, and a taxpayer who is being asked to bear the brunt of paying for the mess created by the greed, irresponsibility, and recklessness of those who made out like bandits in the deregulated atmosphere of the financial system for decades.

When I make mistakes with my money and finances, or if me and my family get into financial trouble we don't get a bailout. But now we, the taxpayers are being asked to do that very thing -- supposedly, for the sake of the country's financial well-being and survival -- at the behest of those who created the conditions for the financial crisis and who mismanaged the economy in the first place.

Voting on the Bailout

I opposed the bailout as it was originally drafted and which was defeated in the House of Representatives vote. There were many good reasons to oppose the original bill as this list from David Sirota points out.

After the bill was defeated in the House revisions were made to the legislation and a vote was taken in the Senate where it passed.

Regarding the second version of the bill, economist Paul Krugman agrees with James Galbraith’s assessment:

In short, as I said at the beginning, the bill is a vast improvement over the original Treasury proposal. Given the choice between approving or defeating the bill as it stands, I would urge supporting the bill. I do so without illusions. There need be no pretense that it will solve our underlying financial and economic problems. It will not. The purpose, in my view, is to get the financial system and the economy through the year, and into the hands of the next administration. That is a limited purpose, but a legitimate purpose. And it may be the most that can be accomplished for the time being.

Alternatives to the Bailout Are Out There

Contrary to leaders like Bush, Paulson, and leaders within the Congressional Republicans and Democrats that say pass the bailout as it stood or face certain catastrophe, there are alternatives to the bailout and I supported taking a good, long look at these alternatives and make them part of the criteria by which any bailout should be structured.

Here are a few examples from the Progressive sphere:

The Service Employees International Union
The Congressional Progressive Caucus
Campaign for America’s Future
Robert Reich guidelines
Bernard Sanders guidelines
James Galbraith guidelines

The Main Point

Paul Krugman and James Galbraith, among many other economists, agree that this latest revision of the bailout is, at best, a stopgap, band-aid gesture so that the economy does not collapse completely—for the short term. They estimate that short term being establishing the next administration after the November elections. For such an important bill and vote, that doesn’t inspire much confidence in me as a citizen.

Senator Bernard Sanders argues:

This bill does not effectively address the issue of what the taxpayers of our country will actually own after they invest hundreds of billions of dollars in toxic assets. This bill does not effectively address the issue of oversight because the oversight board members have all been hand picked by the Bush administration. This bill does not effectively deal with the issue of foreclosures and addressing that very serious issue, which is impacting millions of low- and moderate-income Americans in the aggressive, effective way that we should be. This bill does not effectively deal with the issue of executive compensation and golden parachutes. Under this bill, the CEOs and the Wall Street insiders will still, with a little bit of imagination, continue to make out like bandits.

This bill does not deal at all with how we got into this crisis in the first place and the need to undo the deregulatory fervor which created trillions of dollars in complicated and unregulated financial instruments such as credit default swaps and hedge funds. This bill does not address the issue that has taken us to where we are today, the concept of too big to fail.

And THAT’s the point. Any bailout or any solution to the financial mess we are in must address these underlying causes that led to the crisis in the first place. And nobody who is in a position of power or leadership seems to be listening to the glaringly obvious common sense of people like Sen. Sanders.

The bailout may very well pass the House on its second go round, but the underlying causes for the crisis will remain and will be unaddressed. As one of my friends put it to me in an e-mail:

There will be NO addressing of stronger regulatory action on Wall Street down the road. There will be no punitive measures against the speculators who caused this mess in the first place. You will not see any Congressional checks on executive power from the Treasury Department. There is NO later. It doesn't matter if it is McCain or Obama who sits in the White House either.

Once the bailout money jump starts the credit flows between the banks, all of the talk about changing the culture of Wall Street and reigning in the excesses of market capitalism will die away. Finance industry lobbyists will shower members of Congress with un-reported gifts and reported campaign contributions. It's business as usual once again.

The Final Word

So if you are in favor of the bailout there is good news for you in that momentum seems to be on the side of the Senate version passing the House. But you better not have any illusions that what you are supporting is THE solution to the crisis. I agree with the Krugman-Galbraith camp that says what the bill represents is, at best, a stopgap measure designed to have the economy limp its way along until the next administration is established.

I’m in the camp of Sanders and others who offered alternatives to the bailout and who argued that the underlying causes of the finance crisis must be addressed. The only reason the Progressive vision cannot be articulated into a viable alternative to the bailout as it was presented by Bush, Paulson, and Republican and Democratic Congressional leaders is that the Progressive movement does not have the political juice to set the agenda. That doesn’t mean they are wrong. That just means politically, they largely function in the margins and are not players.

Don’t let the debate begin and end along the terms of whether the bailout bill should be passed or not. The problem goes much deeper than that and doesn’t deserve to die down whether or not the bill passes.

Cross-posted in An Ordinary Person


Brian said...

I agree that the Bill isn't a long-term solution. I don't think it was intended to be, especially since there is about to be a change in administrations.

I think the Congress (being at the end of its session) knows that it can't do much more than this at the moment.

A long-term solution will involve improving regulations, overhauling the financial sector... and one thing that I would push for if I were in Obama's cabinet... there needs to be an emergency fund....a fund of at least $500 Billion, that could be used to fix these messes (or any other disaster that the Country might face). It would probably take years to create a fund like this, because money is too tight right now. But there definitely needs to be a rainy day fund system. But the main focus should be to make sure this doesn't happen again.

One thing that has been revealed... is that much of the economic growth over the past decade or so... has been false growth. This economy had bubbles all over the place...starting with the tech sector... now with the financial sector and the housing bubble... we have been riding on these bubbles...and when they burst, everyone is affected in some way...whether it's losing a job, having work hours cut back, losing benefits, losing retirement savings, etc. Much of it stems from these investment companies and banks (and more traditional corporations) lying about their earnings... inflating their value, etc. That's one of the things that led to this latest collapse. If these companies had been honest about their books, 2, 3, 4, 5 years ago... then the fall would have been more gradual...and the economy may have been able to handle a more gradual slowdown. Instead, these CEO's and CFO's kept lying and lying about the value of their assets...that they reached a point where they couldn't lie anymore...and the floor fell from under them (and us). Now the FBI is investigating a lot of these organizations for fraud. So something has to be done about accounting practices and earnings reporting, etc...overall transparency.

I'm with you... we shouldn't pay for the greed & poor management decisions of wealthy bankers, CEO's, and Fund Managers on Wall Street.

But doing nothing, or waiting to pass an alternative (that probably wouldn't work) isn't a realistic option.

Should we just wait for things to deteriorate further? Some Americans would rather have nothing happen in DC.... and would rather see the system collapse I guess... I guess somehow they believe they wouldn't be affected by that. It's like the folks who can see a hurricane coming on the weather radar, they hear all the weather reports and warnings for over a week...they hear the orders to evacuate... but they decide to stay put because they don't feel as though the disaster will impact them....perhaps they've never been through a hurricane before so they think that it's something that is just on TV...that it's not a real threat. The same mentality is working overtime when it comes to this financial crisis.
You have half of Americans who are doing well and aren't really being hurt by the economy...and don't feel there is a crisis.... then there's the other half who are struggling, and don't feel that tax money should be used to rescue the economy... they see it as a giveaway to the rich... not understanding how the financial system works and how THEY CAN be affected.

The debate on this in the media over the past two weeks has been one sided and has done more to misinform than to inform. That's typical of the MSM I suppose, but in this case, this tendancy has been highlighted that much more, because this is such an important issue.

redante said...

Hello AI

I am glad we are on the same side of the fence on most of the major points on the need for urgent reform.

Bailout aside (it is fruitless to argue whether or not it should have passed or not -- it already passed this afternoon) I certainly hope that an Obama administration -- if they win this November -- would be open to have people like Sen. Sanders and other dissenting voices be part of the discussion on what regulations and safeguards to enact so that this type of economic meltdown does not happen again.

It depressed me to witness how the Progressive movement really does not have the political muscle to even be a serious part of the discussion of solutions in a crisis situation where the ones in power were seriously weakened and their credibility at an all time low.

Imagine how the discussion of bailouts would have been if Progressives were more of a powerful bloc and could have really forced a wide-ranging discussion of alternatives to the bailout as it was drafted.

My big fear is that when things stabilize a bit that all this talk of deeper, underlying causes of the economic factors that necessitated a bailout needing to be addressed will be forgotten and will be swept under the rug. My friend whom I quoted in my post would have been totally right about business as usual returning with nary a scratch. And where does that leave us -- back to square one but $700 Billion or more down the hole.