Wednesday, October 1, 2008
The bailout and the end of "Reaganism": That's not the whole story
I agree with much of what the Washington Post's very liberal op-ed columnist Harold Meyerson says in his take on the big picture to be drawn from the financial crisis.
This is the end of Reaganism -- to a degree. It's the end of ideologically driven economic theory -- a lot of which came from Arthur Laffer, Reagan's somewhat weird promoter of "supply-side" economics, and some of which came from disciples (acolytes?) of Milton Friedman and his (University of) "Chicago School."
Reagan was much more than his economic theory -- so it's wrong for Democrats (and columnist Meyerson) to use the current financial crisis to try to pull down his reputation and break it into pieces a la the Saddam Hussein statue in Baghdad's Firdous Square in 2003.
The financial markets do need more regulation. But regulation alone is a simplistic answer. Look at how Wachovia was saved from a bank run that very well could have triggered a national, and maybe international, catastrophe. The successful outcome -- Citibank buying most of Wachovia's assets -- was an impressive example of the federal government working with the private sector -- with no evidence of the public regulators being heavy handed. Indeed, the regulators, in this case, were quite savvy and prescient -- and fast moving enough to put together a plan in the early hours of Monday morning (Sept. 29) before the markets opened.
Unfortunately, the Wall Street bailout -- even though it was originally penned by Treasury Secretary Paulson, the former CEO of Goldman Sachs who, pre-financial crisis, sang the praises of deregulation -- is, in its evolving legislative form, way too regulatory. As so many critics, including myself, have said, it's an undesirable "bailout" when what Wall Street and the rest of America need are a "workout." (I latched onto that catch phrase before Republican free-market zealots in the House.)
Was does that mean?
It means that the government injects money into Wall Street, but with these conditions:
First, the Street's financial institutions consider holding on to "toxic" mortgage securities that they believe can become marketable as the real estate regains its health over the next five years.
Second, in the case of securities that are judged to be hopeless, the institutions that hold them will, with federal financial support of their balance sheets, dump them at a salvage price.
Third, the federal government's aid to troubled institutions will be guided by how honestly they seek to meet legitimate credit requests, both private and public.
None of these conditions implies imposition of heavy-handed regulation on Wall Street. We don't need bureaucratic stifling. As Reagan or Friedman -- or, for that matter, John Maynard Keynes, whom liberals revere -- would agree, wealth is created and enlarged by private enterprise. Government should be a vigilant participant in economic activity, but when it tries to play quarterback or coach -- like Paulson & Co. did -- look out.
Of course we can't achieve the desirable outcome without Congress doing more major work on the terribly drafted -- and named -- "bailout." But we can't rely on Capitol Hill's leaders alone. Presidential candidates Obama and McCain need to weigh in -- and not just with platitudinous rhetoric. I've repeatedly argued in this blog for them to do get down to the details. A new Washington Post editorial makes the case more effectively than I ever could.
A further thought: The workout ultimately will have to include not only Wall Street but all of us. We Americans, whichever side or end of Main Street we may live on, have often been spending beyond our means. We got second mortgages to live more largely. The cruise-ship industry has thrived so gaudily mostly, I bet, through major mad money found through second mortgages. We borrowed with gusto against our credit cards. Think about those TV commercials for credit cards -- conferring respectability on living on debt upon debt -- at sometimes 24% interest (which of course is never mentioned in the commercials).
The odds are that Congress will pass the bailout in its essentially bad form. But by early next year, I'm sure, we'll know we need to move ahead to a workout -- by and for all of America. Maybe we should get ready by reaching out our hands to each other, from sea to shining sea.