My Two Cents

The systemic bailout

Chris Farrell Sep 19, 2008

Last night, I was doing laundry and watching the news when Paulson, Bernanke, and the main powers of the House and Senate came out of their meeting about the financial crisis. It had become apparent to everyone that the ad hoc approach to stemming financial panic wasn’t enough. It was time to go fight a systemic financial crisis with a systemic financial solution. It was striking during their press conference how leaders of both parties from the House and the Senate spoke with one voice, with no partisan sniping, no words of support to their partisans. You could almost hear the echo of Henry B. Steagall, head of the House Banking and Currency Committee in 1932:

Of course, it involves a departure from established policies and ideals, but we cannot stand by when a house is on fire to engage in lengthy debates over methods to be employed in extinguishing the fire. In such a situation we instinctively seize upon and utilize whatever method is most available and offers assurance of speediest success.

So, it looks like a trillion dollar or so bailout through an agency reminiscent of the Resolution Trust Corporation of the late ’80s and the Home Owners Loan Corporation of the 1930s. Here’s Yale University economist Robert Shiller in his new and prescient book, The Subprime Solution:

In a financial system seize-up such as the one we are now experiencing, we must, putting aside our political and policy differences, fall back immediately on a more basic social contract–one that dictates that we as a society will protect everyone from major misfortune and keep existing problems from spreading further, subject to the dictates of common sense. That social contract is out most valuable protection, for we as a society can never plan for all contingencies.

Will the mother-of-all-bailouts work? Yes.

Will the recession get worse? Yes.

Will households be forced tio continue to work down their debts even after the crisis and the recession passes? Yes.

Shoud the financial services industry be regulated diferently in the future. Yes.

Should you believe it when financial services lobbyists tell you new regulations will raise your cost of borrowing. No.

Will anything happen to Stan O’Neal, Charles Prince, Richard Fuld, Warren Specter, and other financial titans of Wall Street–the best and the brightest that always preached the love of free markets–after they perfected the art of privitizing profits and socializing losses? They pocketed enormous sums of money even after being pushed out of their CEO jobs. They’ll never have to worry about their standard of liviong in retirement, worry about paying a healthcare bill, although may they’ll have to sell one of their houses–and that’s plural. Probably not. .

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