Between the Devil and the deep blue sea. Those are our options in dealing with this financial mess — or so it seems if you’ve been following events since the initial government bailout of Freddie and Fannie. Our, ahem, esteemed leaders in the Bush Administration have acted in a way that’s all too familiar when there are warning signs in the air: do nothing until critical mass has been reached, then make an unprecedented power grab in the name of security. We’ve seen this before: Bush ignores a report about Bin Laden hell bent on attacking the U.S. – and one method is using hijacking airplanes and flying them into icons of western power. 9/11 happens, and what’s the response? How were we to know that terrorists would use airplanes as missiles?
The run-up to the Iraq war: a case study in scaring the hell out of Americans. You remember, right? That “New Hitler” named Saddam Hussein was this close to getting The Bomb, and if we didn’t act, well, let’s just say mushroom clouds going off in American cities would have been in our immediate future. If that wasn’t enough, just throw in a few references to 9/11, Bin Laden, terrorism and one, two, three, we have a compliant populace ready to surrender those pesky things called rights to the government — all in the name of security and overthrowing the New Hitler.
This, my friends, is crisis politics in a nutshell, and it all comes at a price. How much, you say? Well get this: we’re spending over $300 million a day in Iraq, the cost of creating our newest bureaucracy (The Department of Homeland Security) is roughly $37-40 billion a year, and now with the current financial crisis, Congress is supposed to roll over and play dead while they hand over $700 billion (perhaps $1.8 trillion) to the Treasury Secretary to bail out failing or failed financial institutions. You start to add that up, and you’ll see we’re talking about real money here. Might I add that all of this money is being allocated and spent as both candidates for president are talking about tax cuts. If it all seems a bit unreal, that’s because it is. The debt that the government is incurring won’t be paid by us here and now (because, you know, taxes are evil). Rather, it’s being pushed farther and farther into the future where our profligate debt will be some other generation’s problem.
Now, I’m not an economist, but I have been reading and listening to many of the country’s leading economists, and a couple of them have raised points that make me wonder if the “sky is falling” politicians in the government have even considered. For example, Raghuram Rajan from the University of Chicago talked about a few options that haven’t been tried by the financial sector. The first is to recapitalize (or get an infusion of cash) by asking current shareholders for the money. While doing that, CEOs need to entice new shareholders to invest with a Rights Offering at something like one share at half the price. The very last option is the first option we’ve been presented with: the government essentially bails out ailing institutions at a fixed price tag. The problem with this scenario is that once the money runs out, we will be right back where we started. Sure, the government has deep pockets, but money people know that if the government is going to underwrite only so much debt, and then, after that, it’s back to the free market “you pay your money, you take your chances” ethic, investors are going to jump ship and run to investments they deem safe.
But we’re in an election, year and the government has to show the public that it’s doing something. When it comes to the Bush Administration, doing something means take radical steps to overthrow the Constitution they took an oath to preserve and protect, while providing a socialist safety net to the moneyed class. In short, crisis politics saves the day. This time, however, it’s not clear Bush is going to get everything he wants (i.e., a blank check and unfettered power to control the winners and losers in the economy).
According to yesterday’s New York Times, the compromise plan the Democrats proposed contains a few things that are aimed at making sure Congress stays in the game of divided government. The first is oversight — which it looks like they are going to get their way on. Other provisos include the following:
The Senate Democrats’ proposals includes two bold provisions. One would grant the Treasury “contingent shares” of stock in any financial institution that wants to sell bad debt to the government; the other would grant bankruptcy judges the authority to modify the terms of primary mortgages, a step aimed at helping homeowners at risk of foreclosure.
The bankruptcy provision is staunchly opposed by the banking, lending and securities industries and by many Republicans in Congress, but Democrats insist that it is one of the few mechanisms to provide direct assistance to homeowners caught in the foreclosure crisis.
The contingent shares would give taxpayers an equity stake in companies seeking help through the rescue program, potentially allowing the government not only to recoup however much of the $700 billion it spends on bad debt, but also to profit should the financial firms prosper in years ahead. The legislation would require the value of the contingent shares to equal the value of the assets purchased by the government.
You see, it’s okay if the government buys up debt to bail out failing financial institutions, but it’s not okay when the terms of that bailout have an interest rate attached (i.e., government shares in the profits). Also, when it comes to housing, it’s okay for the free market to naturally “correct” itself when foreclosures occur. But it’s not okay to offer homeowners the right (Rights? Middle class and lower middle class people shouldn’t have any stinkin’ rights) to change the terms of their mortgage contract in bankruptcy court to avoid foreclosure. No, in the world of “crisis politics” practiced by Bush and his pals, it’s only important that certain sectors of our republic get the lion’s share of the political milk, while the rest of us wait for a drop or two to trickle down the body politic. If the big money capitalists want to demonstrate they have the mettle to weather the storm their polices and ideology created, they ought to take the advice of folks like Rajan and not let the government provide the umbrella.