Born-Again Democracy
By William Greider
This article appeared in the October 20, 2008 edition of The Nation.
October 1, 2008
http://www.thenation.com/doc/20081020/greider
Our country is at a rare and dangerous juncture. The old
order is crumbling, and virtually all the centers of
power that govern us have been discredited by events.
The president is irrelevant, weak and unbelievable, even
to his own party. The Democratic majority controlling
Congress is stalled by its own shortcomings. The
treasury secretary, given his arrogant approach to the
financial crisis, is not to be trusted as a steward of
the public interest. Nor are the conservative Federal
Reserve and its chairman. The private power of Wall
Street is utterly disgraced and desperate.
This condition of vulnerability is sure to prevail for
at least the next three months, until a new president
and new Congress take office. In the meantime, the
governing elites are clinging to the old order, trying
to salvage it by delivering massive amounts of relief
from taxpayers to the failing financial institutions.
The American people correctly see this approach as a
historic swindle that rewards the villains at the
expense of the victims. A
asked the
why don't we have indictments?"
Indictments can wait, along with fundamental reforms.
Right now the country needs to confront the fire raging
through the financial system and engulfing people and
productive assets in the real economy. Aroused and
angry, the public, for a change, can play a decisive
role in the political arena, as it did when the House
rejected the bailout package. That shock to the system
was valuable therapy. People can drive politicians to
begin facing reality and to develop a more forceful
strategy for national recovery, an approach that serves
the country as a whole and has a far better chance of
succeeding. The sooner our leaders recognize that the
old order is gone, the sooner Americans can begin
reconstructing a more viable and equitable economy.
The calamitous unwinding of financial institutions in
recent months has an ominous resemblance to events that
unfolded after the stock market crash of 1929, when
three years of recurring waves of bank failures and
economic contraction led to massive suffering. The
government, led by the Federal Reserve, was scandalously
derelict during that crisis. This time
reacted more aggressively but still hasn't found a
strategy to stabilize finance or reverse the gathering recession.
Another total collapse like the one in the 1930s may
still be avoided if politics changes direction. We do
have some factors in our favor. First, our living
standard is abundant by comparison, despite our
indebtedness to foreign nations. Second, the New Deal
created economic mechanisms that remain in place as
automatic stabilizers, like federal deposit insurance to
prevent disastrous runs on banks like the ones that
wiped out more than 10,000 back then.
Given the political paralysis, people have to find their
own way. Corny as it sounds, the necessary first step is
honesty--getting a clear understanding of what we are
facing and what can be done, then forcing our views and
ideas on the governing circles in both parties. The
bitter tragedy of our era is that the hard lessons
Americans learned during the crisis of the New Deal
years have been tossed aside--either repealed or
systematically subverted--by the present generation of
governing elites. Democratic partisans who claim an aura
of innocence are falsifying the past. For the last
generation, Democrats have colluded with conservatives
in the destruction of New Deal law and principle. And
Democrats do not yet have a clear idea of how to restore
those lost lessons and update them for our present predicament.
Understanding the situation begins by recognizing the
real crisis--the great wound to the nation that Treasury
Secretary Paulson and his supporters have obscured with
their alarm-bell rhetoric. The
collectively suffered a massive loss of wealth--capital
in the financial system as well as savings in the real
economy of families and producers. With the collapse of
Wall Street's phony valuations, financial capital
disappeared like air from a deflating balloon. Banks are
endangered because they have lost $1 trillion or maybe
twice that. Therefore the banking industry will shrink
considerably. We are witnessing that bloody spectacle
right now--failing firms and forced mergers, either
propped up by government or taken over by private
investors like Warren Buffett.
When
the 1990s after its financial bubble burst, something
like twenty-one major banks were reduced to four. The
system is shrinking in similar fashion, but much faster.
This inspires recurring panic among investors, creditors
and shareholders, but a smaller financial system will
eventually be good for the country--more focused on the
real purpose of banking, which is to channel capital
investment into the economy. In recent years financiers
have instead amassed speculative fortunes by peddling
exotic debt instruments.
Paulson's solution was to relieve bankers of their
rotten assets--primarily mortgage securities--and then
replenish their lost capital. He did not explain this
clearly, because he knows even $700 billion is not
enough to save them all. So his extraordinary powers
would put him or his successor in the role of savior and
Grim Reaper, the titan who picks and chooses which banks
will survive and which must die. But even if he chose
wisely, it would not solve the basic problem. The
financial system is going to shrink no matter what;
under Paulson's plan, the public would be stuck with all
its costly mistakes.
The other half of the nation's great loss of wealth
belongs to the people--ordinary working people, mostly,
who have borrowed heavily in order to sustain their
faltering standard of living under pressure from flat or
falling incomes. Given the bubble of inflated housing
prices, people borrowed most easily from their own
savings--the equity they had accumulated in their homes.
When housing prices collapsed, economist Dean Baker
estimates, their loss of wealth was $4 trillion to $5
trillion. Three decades ago, American homeowners held 70
percent equity in their homes. Today it has fallen below
50 percent. Many families have spent their retirement
savings and are still working.
Just as the financial system is doomed to become
smaller, so must millions undergo a painful fall in
their standard of living. Many already have. There is no
obvious way around this, but if they face the facts,
people can begin to focus on what is possible and then
pressure government to undertake remedies to mitigate
the pain and avoid the worst. Right now, everyone is
scared, hunkering down.
Only government has the leverage to "get the money
moving again," as New Dealers used to say. No other
sector or interest is equipped to raise the financing.
Government can borrow money from people afraid to spend
and wealth-holding institutions afraid to lend, then
pump it into real economic activity. It can issue cheap
loans if the banking system won't. It can forgive debts
or relax the terms if that puts people back to work and
keeps them in their homes. As economist James Galbraith
suggests, it can hand off the money to state and local
governments and make sure they spend it. All this is
elementary Keynesian economics, the doctrine taught by
the New Deal era. I restate it in plain English because
even the Democratic Party seems to have forgotten the
basics, having become obsessively fearful of large
budget deficits (except when powerful interests want the
money). Average Americans need to start saving again,
and business and banking will not begin to reinvest in
the economy until they see that government is leading the way.
tackle two things at once: manage the gradual downsizing
of the financial system in an orderly fashion that
sustains lending, and revive production and employment
by force-feeding activities of many kinds. This cannot
be a voluntary program that simply invites bankers to
participate on their terms. The government must impose
emergency regulatory controls to keep finance in step
with the nation's overall goals. If bankers resist these
terms, they should be cut off, isolated from the
public's lifesaving assistance.
These are not idle suggestions. The nation is now in the
grip of dynamic political change, and this will not stop
with the decision on Paulson's grandiose bailout.
Presuming the bailout prevails in Congress, Paulson will
be handing out public billions to Wall Street players in
the next few months. The political counterforce for
genuine public-spirited solutions should be pushing back
right away. Activists and intellectuals, public citizens
and heavyweight financial players, even some members of
Congress, are already at work on the details. If
Congress reconvenes for a lame-duck session, you will
see some of these measures surface for public debate and
popular agitation.
The essence of this action will borrow ideas and models
from the New Deal and update them to fit our present
circumstances. This not simple nostalgia. It is a
clearheaded recognition that the public interest has not
been served and the crisis will not recede until it is.
Here are five concepts for recovery and reconstruction
that are in circulation. If we are lucky, these
proposals will redefine the next presidency, whoever wins.
1. Stop the easy-money bailout. Instead of buying rotten
assets from Wall Street firms with no strings attached,
the government should examine their books and decide
which banks can be saved with direct infusions of
capital in exchange for public ownership--roughly on the
terms Warren Buffett got when he aided Goldman Sachs
(preferred shares and guaranteed dividends). The failing
institutions should get regulatory euthanasia. This
approach gives the government direct control over the
survivors and ensures that the public is protected from
egregious loss. The model is the Reconstruction Finance
Corporation of the 1930s, which recapitalized banks and
corporations under stern supervision.
2. Help the folks who are hurting--directly. A
homeownership corporation patterned after the New Deal
original would have the money and the flexible authority
to supervise "workouts" for millions of failing
families. This is what bankers do for corporations when
they get in over their head. Government can do the same
for indebted households: stop the liquidation, stretch
out default dates and arrange manageable terms. This is
not a bleeding-heart gesture--keeping families in their
homes is economic stimulus, and it halts the decay of
neighborhoods.
3. Get serious about economic stimulus. We need a
recovery program five or six times larger than the
pitiful $60 billion proposed by Democratic leaders.
These billions should go for the familiar list of
neglected priorities--fixing bridges and schools--but
should also jump-start the green agenda for alternative
fuels and restoration of ruined ecosystems. The
government should subsidize the new industries of our
age, just as New Deal spending financed the modern
development of aircraft, petrochemicals, steelmaking and
other key industries in the 1930s.
4. Re-regulate the bad actors and indict the criminals.
Start by restoring the law against usury--the predatory
lending practices that ruin weak and defenseless
borrowers. Government cannot wait for a relaxed debate
about restoring regulations. We need newly designed
controls over the financiers and well-defined public
obligations imposed not only on banking but also on
hedge funds and private equity firms. These cannot be
discretionary rules. If the money guys don't like them,
they should get out of the business. Paulson's Wall
Street colleagues are already mobilizing lobbyists for
this fight, but they may discover that
been changed by events. The easygoing deference to Big
Money seems suddenly out of fashion.
5. Create a new brain for government management of the
economy. The crisis and the halting decision-making by
the Treasury and the Federal Reserve--not to mention the
secrecy and special deal-making on behalf of financial
interests--make it clear that deep reform is required. I
would start with a special reconstruction and recovery
agency, empowered to lead policy and oversee banking
regulators and the economic stimulus. The Federal
Reserve's so-called independence is an antique
concession to the big banks and doesn't make any sense.
Monetary policy and fiscal policy must be balanced and
decided in the same process. That rational approach
might have stopped the Fed from the biases and
dereliction that led to this crisis.
These ideas and many others are in gestation. They will
reach fruition when politicians and other leaders
swallow their bruised egos and rethink their supine
posture, arm in arm with Wall Street. That looks
improbable at the moment. But voters can help them
change their minds.
_____________________________________________
No comments:
Post a Comment