Not as cogent of an argument as I would have liked, but here it is:
Watch any cable news network in the past two weeks and you will hear countless times that the American people are against this "bailout" package. Anecdotes about congressional offices receiving calls 300-to-1 against the bailout spring from the lips of many congressmen and commentators. One even said that half of the correspondence his office received said "no" to the bailout and the other half intoned "hell no." It's not very popular, one might gather from all of this. Of course, those who are the most worked up about the whole thing will be the ones calling. And save a few brokers and CEOs here and there, no non-lobbying constituent is going to be passionate about supporting it. There's an enthusiasm gap, and the less passionate don't make the effort to send email to CNBC at 3am. The haters, therefore, appear to outnumber the more moderate souls who perhaps believe their politicians.
We shouldn't believe them. We shouldn't even be listening to them. Instead, we should turn to the economists (who have studied past crises -- that is, a relatively small group) and also to those involved with the industry that is failing. Sure, one might say, the latter is biased by selfish concerns and the former are wrong most of the time anyway. But what if they're not wrong, and what if selfish concerns of Wall Street have some relevance to us all? The market -- and by market, I mean not only stocks, but credit and other financial instruments -- is mostly a psychological affair. What those people on Wall Street (and their brethren on Bond St. and elsewhere) believe affects what they do, which affects the way events play out. If Wall Street gets indigestion, the proverbial Main Street ends up with the hiccups. If Wall Street falls off a cliff, Main Street is pulled over the precipice.
Shouldn't the fat cats pay for their sins? Sure, they should feel some pain, but let's not burn down the place to teach them a lesson. The potential for catastrophe is clear. Modeling shows the chain of events that could precipitate a large increase in unemployment and unavailability of credit to large segments of the population, including businesses. It all stems from the failure to act. The time to punish Wall Street, to crucify them on a cross of gold, was a couple years ago, or four years before that, or in the late 1980s. Now, it's too late. We thought we were sticking it to them with Sarbanes-Oxley -- the new regulatory requirements after Enron -- but we used a pin instead of a sword. For thirty years, we could have raised taxes on not just Wall Street fat cats, but all such creatures with bursting wallets. We could have put measures in place to stop the demands for rapid increases in corporate growth, and we could have passed restrictions intended to limit CEO pay. We could have moved interest rates up earlier to prevent the explosion of free money, and we could have cracked down on abusive mortgage practices and fraudulent mortgage-takers. We could have kept Glass-Steagal in place or maintained limits on leverage for investment banks. We could have even de-emphasized home ownership while ensuring that people were able to find affordable, safe, and clean rental properties. Now, we may be able to do some or all of these things, but it won't make a difference. It's no longer about finding a remedy for past ills, it's about keeping US society afloat -- welfare for the nation, paid through Wall Street.
Why would I, as a committed leftist on economic issues, support this package intended to save capitalism? Because I don't think human misery is the right price to pay for most equally distributed resources. The ultimate and irrevocable failure of all "bailout" package proposals would ensure 10% unemployment within six months, and it would greatly damage the country. From this turmoil could spring positive changes, but it would likely also portend demagoguery from the right. We would likely see massive campaigns against immigrants, a revival of dangerous populism, and total disenchantment with the government. The likely result would be problems at home and warfare abroad, once economic decline hits developing markets. Of course, such a situation would provide an opportunity for a great leader to radically change things. I just think this scenario is a bigger gamble than $700 billion. I'm not sure I trust Obama and Biden 100%. And, even with this bailout package, the potential for wide scale change in the economy exists.
By passing a bill, panic can temporarily be averted through a program that will prevent some short-term panics. This will also give the government some breathing room and cover to pass additional, better legislation that addresses this problems more effectively. The bankruptcy laws need to be changed; they are embarrassment now. Credit practices need to be reigned in, so credit card companies don't abuse consumers under the auspices of extending credit more broadly. More than anything, the economy has to be rejiggered so that so many citizens are not dependent on pay day loans, high-interest credit cards, and home equity to pay for necessities. This could be accomplished by large scale government investment in infrastructure, energy, and public transit; control of health care costs through a national health care framework; radical changes in the tax code; and smart investment in education. For Wall Street, liquidity can be boosted by the government buying preferred shares in banks (ie. a nationalization of the banking industry). If absolutely necessary, housing could also be nationalized to a large degree. Finally, the government could abandon its support for 401(k) plans and allow citizens to pool money into secure, fixed yield retirement accounts (that is, movable pensions) used to supplement social security.
The bailout addresses the current debacle by providing massive cash infusions to the banking and financial industry (through the purchase of bad assets and equity). By doing this, confidence in these organizations will increase, averting sell-offs, downgrades, and overall panic. Of course, many institutions are not only illiquid but insolvent, so this is far from a long term solution. Relief will only last a few months at the most. Nevertheless, this plan will allow them to fail in a way that does not damage other institutions. If the financial industry is a big metal chain connecting money to individuals, then a massive institutional failure causes a single link to fall off. The chain breaks. The governments job is to provide a thread that runs through all of the links. If one link falls off, they are still connected by the thread.
It's not a perfect or even good plan by any stretch of the imagination, but the failure to act right now could be catastrophic. Let's hope that the House can pull just enough votes tomorrow morning to get it past.
