The Bailout

Welcome to the end of capitalism.

Well, not completely, but the United States was one of the last outposts of cowboy capitalism in the world. In most of the free world, people have accepted the government as a legitimate referee in the markets. Here, we still argue about it. I think it's obvious that capitalist markets produce more wealth and a larger middle class than planned markets. However, laissez faire has produced bad results in the past, and the modern disciples of laissez faire have managed to produce bad results in the present day.

Here's something you can count on: the prophets of "hands off" will find excuses for the crisis that absolve them of any blame. That's what they always do. Faith in invisible hands must be maintained at all costs.

So why are we bailing them out?

We're not, really. We're bailing you out. The preachers of greed were not gambling with their own money. They were gambling with the entire economy. There is a real potential that the credit system could lock up, which would have a devastating effect on employment. If you work for a corporation, as many of us do, they are probably charging your paycheck to the company MasterCard(tm). Corporations must have access to credit for day-to-day operations. Even small businesses need credit. It's a competitive world, and many small businesses keep up with their competitors by leveraging their credit. With no credit available, small businesses dry up.

Look at what the crisis is doing with the housing market. It started with the housing market, but the crash of investment banks is having a feedback effect. Home prices are dropping. For most of us, our biggest investment is our home, and we're seeing the value of our investment drop every day. Our mortgage payments don't drop, though. If you have an adjustable rate, you can see your payments triple. The laws of supply and demand would say that this is a good time to buy a house, because prices are low. The surge of new purchases should bring prices back up, until supply and demand reach equilibrium. That is not happening. With credit very tight, even people who are in a good financial position are having trouble getting loans. To get a house today, you'll need a very good credit score and a large down payment. The banks don't have a lot of cash to risk right now, so the terms for getting a house will be unfavorable.

If something isn't done, we're all screwed. House builders and realtors are truly screwed. Parents who planned to use their home equity to pay for their kids' college or their own retirement are screwed. People in corporate jobs are screwed. Small business owners are screwed.

Here we have this 700 billion dollar bailout. That number just makes me want to choke. That's nearly a trillion dollars. When I was a kid, a trillion dollars was a lot of money. Now we're talking about the government spending nearly a trillion dollars in one move. This on top of the debt we've already contracted from China and other countries that don't like us very much.

The Treasury Secretary and the Chairman of the Federal Reserve Board are telling us that the bailout is absolutely necessary. We have to buy up the banks' bad debt, so they'll be able to continue to loan money to large and small businesses that need it. Failure to act, they say, could cause the whole economy to seize up.

They are right in two respects. First, the economy could indeed seize up. There is a real danger. That is a damn shame, considering the safeguards Democrats put in place to prevent that from happening. We saw the tragedy of unfettered capitalism in the Great Depression, and we didn't want that to happen again. Decades of Republican deregulation eroded those safeguards. Oh, and Bill Clinton had a hand in that, too. Let's not spare anyone.

If only we had accepted some sensible regulation earlier, there would have been no crisis. But that is hindsight. It's too late now. We have to deal with the facts at hand.

They are also right in another respect: the government must act. In 1929, Herbert Hoover did nothing while Rome burned, so to speak. He assured the press that the "fundamentals of the economy are sound." He held meetings in which no business was conducted. There was no effort, coordinated or otherwise, to stop the crisis. Absolute faith in free markets was allowed to play out. The invisible hand was supposed to solve the problem.

The lessons of history are so glaring that not even George W. Bush wants to be Herbert Hoover.

The president went on TV last night to urge passage of his 700 billion dollar (choke!) bailout plan. It was almost comical. The current economy is the Bush economy. Today's conditions are the result of his policies, which are still in place despite the Democratic takeover in Congress. He can't blame Bill Clinton or his opponents across the aisle. As the President, he has authority over the regulatory agencies, and his era has been one of lax regulation and looking the other way. All the while we were assured that his tax cuts and deregulation were vital for the health of the economy.

After nearly eight years, he goes on television to say "Oops. We broke it."

This is a hat-in-hand moment for George W. Bush. We (and by we, I mean I and others who share my philosophy) have been warning Bush and the Republicans what could happen with their policies. We were pooh-poohed, called "girly men" by Arnold Schwazenegger. O'Reilly and Limbaugh made fun of us "tax and spend" liberals who want to anchor down business with our regulations. Oh yeah, we were the comic foil. Who's laughing now?

The purpose of regulation is not to destroy capitalism, nor to create a mixed economy. Sensible regulation is in place to save capitalism. The free markets work great most of the time, but greed and corruption have a way of creeping in from time to time and gumming up the machinery. Laissez faire capitalism eats itself! If capitalism is to survive, the dangerous parts of it must be mitigated. The public must be protected.

We need a bailout of some sort. I don't know if it will be 700 billion dollars. The Democrats are telling the executive branch that it will not get a blank check. That's good. One department in the White House should not be responsible for spending that much money. If we're going to shell out the cash, we deserve a say in how it is spent.

Will some of the people who caused the problem also benefit from the bailout? Yes. That can be mitigated, but there are always a few who figure out how to get away with murder. I am not willing to bring down the whole U.S. economy (and, by extension, the whole global economy) for the sake of denying a few miscreants their filthy lucre. Maybe in the long run we can round them all up and put them behind bars where they belong.

What does this mean for the future? It means higher taxes. Barack Obama promises tax cuts for 95% of all Americans. He may continue to promise that, but I don't see how that can happen now. The tax rates of the top income brackets will go back to the pre-Bush levels. A drawdown of troops from Iraq will also help reduce spending, though some of them will be redeployed to Afghanistan. What about universal health care? I think it will be a money saver in the long run, but it has a short-term cost. It could be held up in congress because of the deficit.

Republicans, I guess, would argue that we should lower, not raise, taxes. They will argue that tax cuts will boost the economy, and the added revenue will help reduce the deficit. They are still enrolled in the cult of the thoroughly debunked Laffer Curve. McCain wants to cut earmark spending, which isn't even a drop in the bucket compared to the total deficit. Republican spending cuts, even if they all passed, would not make up for the amount of money they are now asking us to spend. We can’t cut our way out of this mess.

If we dig ourselves out of this hole, we should take some steps to prevent this from happening again. Obviously some sensible regulation will help, but you can’t count on it in the long run. There will always be faithful conservatives who cling to the old laissez faire religion. After a while out of power, they will push their ideas into policy again. It is inevitable, because their ideas are attractive. They tell us we can have a better economy by doing nothing! Just take the hands off and let ‘er rip! We should prepare for the next crash. During times of economic prosperity, I recommend starting a bailout trust. It would be funded by small fees on investment transactions. We can set a target amount, say, $300 billion. We can set a time frame for reaching that amount—say seven years, ten years, whatever would be relatively painless. Once the total is reached, the principle is locked until needed for the next Republican bailout. In the meantime, the interest will go into the general fund, reducing the tax burden on everybody.

Yeah, it is not fun to take $300 billion out of the economy and lock it away, but if we don’t do it, taxpayers will be on the hook when the geniuses of finance get us in trouble again. At least the bailout trust would be funded by the people who are gambling with the economy. Also, it could be a tool to fight inflation. When we need to tighten the money supply, cash can be safely locked away in the trust.

The crisis is big enough to make John McCain stop campaigning for president, a move that is just plain weird. It is one of those big sea changes, when everybody involved realizes that their actions will be written down in history books. There is a major difference between 2008 and 1929: the victims of the earlier crash had to wait until 1932 to vote for change at the top. This time, they only have to wait about forty days.

© 2008 Bryan Lower

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