Why
the Bailout Won't Do Anything for the Root of the Problem
October 16, 2008
By
John Miller
Nothing
in the plan will stabilize plummeting home values.
Hyman Minsky,
the theorist of financial fragility whose work has enjoyed
a revival as U.S. financial institutions crumble, always
maintained that "there is nothing wrong with macroeconomics
that another depression wouldn't cure."
Whatever salutary
effects today's financial crisis, undoubtedly the worst
since the Great Depression, might be having on macroeconomics,
it has yet to improve economic policymaking. The Bush administration
exploited a financial panic, vastly exaggerating its dangers
for the broader economy, to extort $700 billion from a Congress
only too willing to open taxpayer's wallets to bail out
those who benefited from the speculative excesses of an
$8 trillion housing bubble.
Whatever this
massive public purchase of bad debt will do to patch up
the credit system, the bailout will not counteract the downward
spiral in housing prices that brought on the credit crisis
and will undoubtedly continue. The bailout will do little
to make bad mortgage debt more viable or to provide relief
to homeowners behind in their mortgage payments or facing
foreclosure. Nor does the bailout place effective limits
on CEOs' pay or their golden parachutes, erect the regulatory
safeguards that will curb future financial excesses, or
counteract the worsening recession. Worse yet, the bailout
swells the federal budget deficit and for that reason will
likely sap whatever political will could have been mustered
to make the massive public investments necessary to prevent
the economy from falling into a prolonged depression.
For the policy
maestros to do better than this disgraceful, already-failed,
confidence trick of a bailout package that entirely ignores
the elephant in the room (as economists Nouriel Roubini,
Paul Krugman, Joseph Stiglitz, and Glen Hubbard have described
it), the crisis will have to put an end to the illusion
of self-regulating markets, much as Minsky envisioned a
depression might.
But neoliberal
prestidigitation continues. Even as the Wall Street Journal
reports that the financial system has been "shaken
to the core," its editors steadfastly maintain that
the "sins of deregulation" are "a political
fairy tale" in an attempt to absolve the market from
blame for the crisis. The government-sponsored enterprises
Fannie Mae and Freddie Mac, complain the editors, "turbo-charged
the credit mania" by subsidizing rates of return for
mortgage-backed securities and increasing the number of
mortgages available to risky low-income borrowers. (For
an accurate portrayal of Fannie's and Freddie's role in
the crisis, see page Fred Moseley's article in the current
issue.)
The Journal editors'
latest free-market sleight of hand notwithstanding, unregulated
and deregulated financial markets combined with new, harder-to-regulate
financial instruments and ever-present greed to unleash
today's pernicious economic instability. As the economy
teeters, we must challenge the antidemocratic dictates of
an inflation-phobic Wall Street to demand that government
effectively regulate the entire range of financial institutions
through strict capital requirements and a tax on speculative
turnover intended to encourage long-term productive investment.
We must build institutions of regulatory enforcement that
will remain strong when the next bubble comes and its beneficiaries
pour buckets of money into the political system to move
their deregulatory agenda forward. Likewise, massive public
spending is needed to put the nearly one million people
who will have lost their jobs this year back to work and
to jump-start the economy. Public policy must also be dedicated
to spreading the benefits of renewed economic growth widely
through progressive taxes and by putting the interests of
people before the profits of those who have recklessly polluted
the economy with toxic debt.
Without those
measures, Wall Street will continue to be, as Woody Guthrie
put it in the midst of the Great Depression, the street
that keeps the rest of us off Easy Street.
Original
Article: http://www.alternet.org
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