When the majority in Congress, Wall Street, economists, and news pundits are talking about why we HAVE to do something about this financial crisis, it’s time to examine whether the course of action they’re recommending is really in our best interest. I’m suggesting that the House Republicans who voted against the bailout may have unwittingly done the right thing for the wrong reasons (Regulation = Bad for Economy). And that might be okay. Do we really need a bailout of firms complicit in over-leveraging of the Great American House of Cards? Or is it okay because there will be a little more oversight this time?
Those on the right who voted against the bill are concerned about the government having too much control over the market. “It’s Socialism!!” But since financial transactions based on credit were created, there has been a regulatory environment in which the market can operate freely. Examples include the SEC, Federal Reserve, shareholder rights, etc. The key is creating a system that ensures that investments are made for the long-term, while allowing entrepreneurs the freedom to create jobs, invest in R&D, and put profits back in shareholder pockets. Just not outrageous ones. (See: “ExxonMobil, Profit in 2007”)
We got into this mess because of an over-reliance on the wonders of speculative stock bets by the Titans of Wall Street who were working for greed, rather than the public. Take this little nugget, for example: the first bailout bill that failed was for $700B, then they COMPLETELY reworked it from scratch, and still ended up with a $700B price tag. Does this strike anyone else as strange? Well, it should. The foxes entrusted with guarding the hen house have no idea what they’re doing. Plus, when has a government price tag ever been too generous? Remember when Bush’s chief economic adviser, Larry Lindsey, was fired back in 2003 for suggesting that the Iraq invasion could cost up to $200B?
When politicians on both sides of the aisle were advocating that pensions and the like should be able to play in the stock market, it was in everyone’s best interest, because the market was going up, up, up. But now these investments have been exposed for the Ponzi schemes they are, and the public is collateral damage. Their retirement accounts were invested in short-term financial models built on highly leveraged assets, rather than in bonds (and other stable long-term investments) that help build and create tangible things that can be used for years to come (infrastructure, government investment in renewable technologies, etc.).
The investment banks/insurance firms have been hitting home runs for eight years, and now they have been called out for juicing. We are right in the middle of the financial version of the Mark McGwire Effect. For those unfamiliar with baseball, McGwire was America’s favorite son as he swatted his way towards the home run record back in 2000 (Oh, what simpler time!). Following allegations that he was using steroids, the next two years were marked by a significant drop in production. When called before Congress to testify on the scandal, he said he didn't want to talk about the "the past." Sound familiar?
Optimistically, what we’re headed for is likely not a depression, but perhaps more of a realignment and contraction of our economy. However, this is a great opportunity to begin to take a longer view of our financial systems, and to make fundamental changes in how our country’s regulatory environment operates. How can we best to protect those whose financial knowledge starts and ends with the balancing of their checkbook, rather than arbitrage opportunities based on micro-fraction changes in the stock market that promote short-term thinking?
Pessimistically, all lending will cease, more houses will be foreclosed, unemployment will rise to 20%, and we’re back to pre-WWII America. Hey, there’s your solution right there. Invade Iran!
But seriously, it’s all well and good to say that things will go to seed, so what do we do?
For one, we have to jumpstart manufacturing and start making things again. This was outlined nicely by Thomas Friedman the other day. Too many jobs have been going overseas, because Cheap, Cheap, Cheap, is the name of the game in Capitalist America. And I know, because I’ve just gone through a 2-year indoctrination program on the subject. Jump-starting a green economy will be essential to the next wave of American ingenuity. And make no mistake, the investment money isn’t going to “dry up.” Sure, businesses will have a hard time getting loans, and greater scrutiny will be paid to business plans, but private equity firms will not disappear entirely. For projects with long-term time horizons with steady rates of return, the money will be there.
Unfortunately, some type of bailout will probably occur. Our elected officials on the Hill will hold their noses and vote for something that does little to solve any structural problems of our economy. Nonetheless, I believe that five years down the road (in Obama's second term), things will start to turn around and the U.S. will have a much stronger economy than it does now. Built not on a highly-leveraged financial model, but by a committed effort that recognizes that wealth on a balance sheet, but not in the bank, is unsustainable.
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Other News
A couple of other opposing views of the bailout, here and here.
Clinton was complicit in removing the barriers between investment banks and insurance firms. But who sponsored this legislation? Phil Gramm (R-TX), McCain’s economic adviser, back in 2000.
For all those conservatives up in arms about VP moderator, Gwen Ifill, and her new book, they should take a few deep breaths before going down THAT particular rabbit hole.
Want to contribute to the Obama campaign, but live far away from swing states? Sign up to call people in places like Colorado or Ohio.
If you only occasionally watch The Daily Show, yesterday’s included a particularly scathing rant by Jon Stewart on the guardians of our economy and Congress. Bill Maher is on as a guest promoting his new book, and hammering away on organized religions. And for those of you who get your news solely from The Daily Show, it’s a lot funnier if you don’t..
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