The age of greed continues

I want the Obama rescue packages to work. I’m delighted the stock market loves the Toxic Asset plan. But at best it is only a (very expensive) partial solution and, as a consequence, I’m growing increasingly worried. 

This latest plan, like many other components of the Obama economic program, does not represent the kind of transformation once promised or that which might seem appropriate in a crisis of this magnitude. To date, the polices of the Obama administration have not done anything to reverse or even patch over the systemic flaws that put the entire global economy in peril. Fifty trillion dollars in perceived value have been wiped off the world’s books. Fifty million jobs are likely to be lost to the crisis by the end of this year alone. Fifty billion dollars was the cost of just one fraud. Washington meanwhile was too close to Wall Street in the run up to the crisis and deeply mismanaged and financially reckless itself, neither shortcoming seems to be on the list of things for which the administration is seeking a fix. 

Instead, what the Obama administration has provided thus far is a team of the same guys who also have historically been close to Wall Street and who have in the past few months seemed to be pursuing a perverse form of bipartisanship that rehashes many of both the old Democratic and Republican missteps that have been so damaging in the past. The stimulus reiterated the old trickle-down absurdity that minor tax rebates and cuts could meaningfully help restart the economy — even though such approaches often hadn’t worked in the past and this was an entirely new kind of crisis. It contained some programs that could only be construed as pork and it made no provision for their efficient implementation, punting many to states and localities without the absorptive capacity to handle them. The Obama economic team produced a multi-trillion dollar budget that had many good core initiatives –needed ones in energy, health care and education — but said “we’ll figure out how to pay for them later.” Where a tax was included (as others should have been), their spokespeople typically hemmed and hawed about calling it what it was…(even though the purpose and public policy benefit of a cap and trade system is actually to make dirty energy more expensive so people who are seeki ng savings become more efficient or selective about their energy sources). The administration has rolled out trillion dollar addition to the deficit after trillion dollar addition and said, “we’ll get it to it later” even though it is clear the only way to fiscal health in the United States is a massive health care reform far more sweeping than what has been called for to date. The economic team presumably encouraged the Fed to print another trillion dollars despite the inflationary risk. Further, they said “we can’t afford protectionism” but their actions have suggested that they are in key cases embracing union-driven, tried-and-failed policies that are in effect an effort to reverse historical progress and national commitments.

Now, with Geithner’s address today, they are introducing a toxic asset disposal program that seems to be based on the belief that the best way to restart a market suffering from the disease of untrammeled, unregulated greed is to subsidize the greediest. Having stumbled already in the midst of a crisis that they have known for six months would be their number one concern — by tacitly backing wrong-headed Bush Administration plans, by failing to limit the bonuses with which recipients of U.S. aid could award themselves, by failing to staff their key administration posts, and by producing half-baked financial fixes where real ones were required — this new plan lets us down on several levels. First, as noted by Paul Krugman, an economist with whom I often disagree, it is essentially a rehash of the Paulson plans. Next, it seeks to free up banks to lend again by taking bad assets off their books but without doing anything to ensure that once their balance sheets are cleared up that the banks will start lending at the pace the economy needs. Banks have become very cautious and will likely move very slowly, hording cash, as a way of propping up their credit-ratings and as quickly as possible pay back the government so they can get off the dole and start earning Wall Street salaries again. In addition, many of the big institutions that have stopped lending aren’t banks at all but non-bank financial providers. Further, this fix replays the bigger error of the AIG bailout…not the distraction about bonuses, but the one in which we passed tens of billions through the failed insurance giant straight through, no strings attached to big financial institutions, many foreign. Here, the United States will take away massive amounts of risk from the purchase of the so-called toxic assets enabling the banks and hedge funds who played such a big role in getting us into this mess to get a free-ride at the tax-payer’s expense. If the bets win, the private investors get a big payday…and the subsidy they are receiving as incentive to buy the bad assets comes again with no strings. They feast on the upside. And while taxpayers get some of the upside, they’ll be the ones who have to swallow hard on the downside.

We would very likely be better off if any insolvent banks were nationalized and the toxic assets were removed and placed in a “bad bank” where the government captured the upside for the taxpayers as well as more fully controlling the downside.  In such a system, the government could ensure banks actually restored the liquidity to the markets we needed. But whether nationalization is the path or not…some kind of structured work out might also have given them a break and taxpayers more control, offering a sweet deal to hedge funds (which by the way, have no constraints on how they compensate themselves) not only feels wrong right now doesn’t fully address the liquidity issue or others calling for action. We need to seriously reconsider mark-to-market rules. We need a new super-regulator domestically and new global regulatory mechanisms and, very likely, institutions. The government is not taking some of these steps because they fear they will be called socialist. But as we have seen, all markets require government intervention from time to time. The issue is not what label people apply but what kind of intervention is smartest? The transformationalists had their moment and, apparently, they have blinked, making nice with Wall Street when they should be remaking it. 

Consider this final point: How can Sweden (which got the bank nationalization thing right, by the way, Tim Geithner’s comments about how the United States is not Sweden aside) afford to say no to bailing out Saab, a national icon, while we can’t afford the same with GM? Which country is more committed to letting the markets work in healthier ways? Which therefore might be seen as more truly capitalist? The reason they can make it happen politically is because they have a social system which ensures no Swede fears that economic upheaval will leave him or her destitute or without healthcare. Thus they can afford the creative destruction of markets, but we cannot. Their “socialism” is in this respect more capitalist than our system of bailouts for the richest and subsidies for the greediest. The United States needs new models and to be open to new ideas and we had better start thinking about looking elsewhere because to date precious few are coming from Washington.

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