I wonder how close we were this past week to Great Depression Two? Joe Nocera in his New York Times blog wrote that it was the worst week for financial markets since 1929. Clearly. And that will give me something to think about when I hit the streets this morning for my five-mile run.
It’s something we should all think about. The financial crisis — and the federal government’s response — changes fundamentally our economy and the relationship between the public and private sectors. Also, we have managed to shift the burden of risk from those who caused this debacle on Wall Street to those on Main Street who ultimately will pay for it.
Nocera’s post is titled “A Hail Mary Pass, but No Receiver in the End Zone.” He writes:
Will this latest round of proposals end the crisis? I know the stock market reacted joyously on Friday, but I’m not hopeful. One solution being promoted by the Securities and Exchange Commission — to make life more difficult for short sellers — is a shameful sideshow. A second solution, which Mr. Paulson announced Friday morning, requires money market funds to create an insurance pool to cover themselves against losses.
That may provide comfort to investors who equate money funds with savings accounts, but it is fraught with moral hazard.
And the third solution — the big megillah — is Mr. Paulson’s plan to create a new government mechanism to buy mortgage-backed securities from big banks and investment houses. Once they are off those companies’ books, life can return to normal — or so Mr. Paulson hopes.
He acknowledged that it would likely cost taxpayers “hundreds of billions of dollars.” I think it will cost more than $1 trillion.
It is a weird tribute to the scale of this crisis that Mr. Paulson felt he had no choice but to rush this proposal out, because as the day progressed it became increasingly clear that the Treasury Department didn’t yet know how this mechanism was going to work. It is an idea of a plan more than an actual plan. In football, they would call it a Hail Mary pass. Sometimes, of course, a Hail Mary pass is completed for a touchdown. But most of the time they fail.
I think it is also a weird tribute to George Bush and the Republicans that they have managed to kill any lingering notion that our economy was based on free-market capitalism. And their argument that we need less government not more is now about as bankrupt as Lehman Brothers, et al. It will be an absolute hoot to hear the captains of industry lament the growing involvement of government in the economy and elsewhere. Get over it guys and gals. You’re going to have to come up with something new to opine about at all those conferences where the unbridled capitalists used to congregate.
The financial crisis — like most issues — involves to a large degree confidence and trust. We saw little of either last week — in the stock market, in our financial institutions and in our government. So a lot depends on whether we can restore confidence and trust.
Given that the public has little confidence in both the Bush administration and Congress these days it looks like we’re going to have a tough go of it. Now Congress, which really hasn’t done anything of substance in two years, is being asked to pull together a financial rescue plan that could ultimately cost us $1 trillion. And they are going to push it through quickly (maybe) — while trying to rush out of Washington to campaign. Here’s from an article in The New York Times:
Then the other shoe dropped. Treasury Secretary Henry M. Paulson Jr. told top members of both parties — about to leave Washington to assail one another in a bitter election season — that they had no choice but to pull together and quickly pass legislation providing billions of public dollars to take bad assets off the hands of the nation’s financial institutions.
“Do you know what you are asking me to do?” said Senator Harry Reid, the Democratic majority leader who has struggled all year against concerted Republican opposition, according to multiple participants at the Thursday night session. “It takes me 48 hours to get the Republicans to agree to flush the toilets around here.”
Well, they pretty much flushed the economy down the drain — and John McCain’s presidential hopes with it.
Hillary Clinton summed it up correctly in a statement she released on the financial crisis and federal government response. It’s worth reading — so I’m going to copy the whole statement from Ben Smith’s blog in Politico. Here’s the Clinton statement:
When the American people, facing a foreclosure crisis and struggling economy, turned to this administration for help, the answer was no. Now, the administration is turning to the American people for help, to rescue the credit markets and take on hundreds of billions in debt and financial obligations as a consequence of that same foreclosure crisis. The truth is, Main Street came to Washington and got little. Now Washington is coming to Main Street and asking for a lot. The American people deserve to know that this isn’t a blank check. While the need to address the current crisis is clear, I will only support steps that will prevent a widening crisis, tackle the worst kinds of abuse tolerated for too long by the Bush administration, and address the root problems at work.
The proposed intervention outlined today by Treasury Secretary Henry Paulson would be a watershed moment for our economy. I believe that such an intervention demands that we fundamentally alter the priorities and policies of our nation under the Bush administration that allowed this crisis to take place and escalate. Corporations that will benefit must be held accountable not only to large shareholders but also to the American people. And American taxpayers deserve to know that their money will not allow for a continuation of the status quo: short-term profit at the expense of long-term viability; obscene bonuses and golden parachutes regardless of performance; reckless risk taking that have placed the markets in so much jeopardy; rewards for those who foreclose on middle-class families and sell mortgages designed to fail to turn a profit; and outsourcing of good jobs to serve short-term stock prices instead of America’s long-term economic health. The prevailing dynamic of corporate America, where the sole priority was the dividend, the inflated bonus and the quarterly earnings report, must give way to a new respect for the long-term prosperity of the American worker and the well-being of the middle class.
After eight years of failed policies — and two years of an absentee administration — our only option left may be an unprecedented government intervention into the private markets. The markets must be stabilized to stave off wider turmoil. Nevertheless, the urgency of this crisis does not mean that we should offer a blank check to financial institutions or the privileged few. Nor can we simply allow the administration to use the taxpayers like a “reset button.” We cannot allow Wall Street to act without oversight by a vigilant SEC and administration — and without regard for the American people, who will now have paid twice: in falling prey to a widening credit crisis, and in paying the bill to hopefully bring it to an end.
I will be examining the administration’s proposal very closely to ensure that we do not approve a policy that may stabilize the markets in the short term without addressing the root problems facing middle-class families or the kinds of reckless gambling that was permitted for far too long by the administration. The Bush administration may have changed its tune once the crisis facing Main Street hit Wall Street. But we need to be sure that the American taxpayers — asked to shoulder yet more risk and responsibility — have a voice.
I expect people on Main Street will be doing their talking at the polls in November.
“It’s the economy, stupid.”
Well, time to run.