Bird that Sings

September 24, 2008

The Great Compromise: a Populist plan for the markets

Filed under: Politics,Uncategorized — admin @ 11:17 pm

     All the so-called grown-ups in the room seem to agree. Wall Street greed and malfeasance ran the financial system into the ground, but now we can’t afford to let the financial system fail, even if that means bailing out the bankers and financiers who created this mess and made huge, obscene profits for themselves in the process.

Truthfully, I’ve never liked grown-ups anyway. There has to be some kind of bailout alright, but the terms of this one, even the “Democratic” terms proposed by Chris Dodd and Barney Frank, are not only unacceptable but politically tone deaf.

On this issue the unwashed masses of the Democratic Left and the Republican Right pretty much agree: as a first principle any bailout must be punitive. Taxpayers should not have to bail out the Banks unless Wall Street takes more of the pain than Main Street.

This means that first, any loans and/or straight capital injections made by the US Treasury have to be in exchange for an equity stake in the companies as with the Swedish bailout of their banks in the Nineties. Like in Sweden, the government must have the ability to liquidate insolvent banks and shareholders of rescued banks must invest more of their own capital before public money can be used.

Second, there has to be a lower than market rate limit set on executive compensation by the bi-partisan government review board that will police the “loans”. In other words, there’s no way any of these Wall Street miscreants should be making more than a cop, a schoolteacher or an IRS employee.

Third, there should be no bailout of homeowners who are underwater on their mortgages. It might seem harsh, but the immediate macro-economic reason for the current crisis is the asset bubble that was created by Alan Greenspan to pull the economy out of the dot com crash and post 9/11 panic in 2001.

The era of the asset bubble is over. Home prices have to find their true level even if it hurts. However here, economist Dean Bakers’s idea of some kind of public entity to buy back at least some of these homes—at current market rates—and rent them to the people already living there at current market rates makes sense.

As for the other liberal amelioratives that Pelosi and Frank want to put on Paulson’s bailout to make it more palatable, fugettaboutit. For one, this is a systemic problem, not a political one and their well-meaning efforts are just muddying the waters.

For another thing, in this matter we can no more trust the liberals than we can the conservatives. Chris Dodd, though long a reliable liberal, has also long been in bed with the insurance industry, and though one can be sure his current motivations are completely beyond reproach, money has a funny way of skewing people’s judgment. This goes for most everyone in the House and Senate, not just Dodd. The current system of lobbying and campaign finance is as untenable as this sham of a market system, but it has to be addressed as a whole, hopefully by the next administration.

Now of course there is a big problem with the Great Populist Compromise: Paulson and Bernanke say it won’t work. They say that under the onerous conditions proposed here, banks simply won’t accept the Government bailout. They will then refuse to lend each other money, freezing up credit for the entire system, bringing on a “Great Recession,” or worse.

The bankers are going to hold their breath and, clutching their worthless securities in their gummy little hands, bring down the entire system around them unless they get a bailout on their own terms.

And who are the grown ups now?

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