Monday, September 29, 2008

Monumental Victory Amid Ruins

I suppose at some level I should be happy that the House of Representatives defeated the Administration's and the Democratic Congressional leadership's proposal to bail out Wall Street. Nevertheless, a few facts remain.

One, we are still in dire straits economically. Yes, it is the fault of these industries, a deregulated environment, and the fact we have allowed business to administer the halls of power and our financial well being into what we have now. However, the average American is still spending (earned and borrowed) more than he or she makes in a year. The institutions, once corrected by market forces, are going to destroy the life's savings, retirements, and jobs of millions of people. There is no getting around that.

Moreover, there is no guarantee that any infusion of government money is going to prevent it. The rot of the markets has already set in and has for the past two weeks (arguably the past year, since the subprime collapse occurred last autumn). There is no way even $700 billion is going to rescue it because the fundamentals and credit-worthiness of the companies and its clients remain weak. Did anyone honestly believe that if this bill had passed that the lending institutions would loosen the credit requirements again? We deregulated the industry and cut their taxes multiple times in the past decade and the executives of these companies still managed to put themselves on the economic and financial brink.

Two, there still remains an ideological cleavage in the House of Representatives. More than two-thirds of House Republicans opposed the bailout because they think anything that interferes with the market is necessarily wrong. Forty percent of House Democrats opposed it because, like myself, they were critical of a corporate giveaway and reward for institutions and executives whose criminal conduct destroyed these institutions. This defeat is not going to bridge that divide. If Congress were to really take up the legislation that it should, which would mean concentrating on protecting the assets, retirements, and homes of workers, instead of executives, those same Republicans would likely oppose it, as well as any regulations on an industry they were vital in deregulating back in the 1990s (with the help of then President Bill Clinton). It seems highly unlikely that this Congress will do anything that is of value.

Three, the threat of a future watered down bill in Congress still remains. The House is going to reconvene on the issue shortly, certainly no later than next week. When they do, you can be assured that the full persuasive force of the White House and Congressional leadership will be used to manufacture sufficient votes. Of course, the legislation will be reworked to give the appearance of a different and improved bill, but it will be nothing of the kind. This bill was defeated because of Congressional Republicans. Their votes will not be swayed by a reintroduction of the Glass-Steagall Act. Indeed, it would only agitate them all the more.

Four, Secretary of Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke cannot be trusted to implement any plan for regulation, recovery, and certainly not a taxpayer giveaway. Paulson is an ex-chief executive at Goldman Sachs. He knows most of the executives I have fulminated against for the past week. There is a reason he has been so vociferous in wanting to see them succeed. This was all the more reason why his initial proposal called for no oversight of his government purchases of failed companies. Bernanke has also been intimately involved in this crisis, as one of the apologists for predatory loan practices, which facilitated what we are residing in today. In fact, as an economist Bernanke (ad admirer and friend of Milton Friedman) was one of the early supporters for the overthrow of the Glass-Steagall Act back in 1999. Trusting people so closely involved with the bureaucratic mechanisms and causes for the current state of affairs is not a recipe for economic recovery.

Still, there is one thing you will be able to rely on. The continued lack of a backbone and frequent side-by-side appearances of the Congressional Democratic leadership with President Bush, extolling the virtues of bipartisanship and "putting our country first."

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