The Big Bailout

By Peter Bearse

BAILOUT or BAILEY?

It’s not the Christmas season but it’s not too early to recall the movie often replayed during the season, "It’s a Wonderful life." The hero, hometown banker George Bailey, beats out the greedy, grasping bigger banker, Mr. Potter. We’d all like to see this story played out nationwide, so the George Baileys of this nation – men of integrity – beat out the big boys who have been playing fast and loose with our money and their new financial-derivative toys. But it ain’t gonna happen. The ratio of Bailey’s to Potters seems to have gone down a lot since the “good old days.” And too many of us “customers” of financial institutions have become part of the problem, not part of the solution. The story-line is not just “High Noon” on Wall St.; it’s also P.T. Barnum on Main St.

So, the country’s in a financial mess, and people are asking: Why do we taxpayers have to pay for it? Why, indeed? – Because the game that goes with the story-line is not a blame game; it’s a matter of who takes responsibility. Since most of us stand to lose something if the economy tanks, it’s a matter of shared responsibility. We either hang together, as a nation of responsible citizens, or most of us will hang separately.

The “mess” originates in the financial sector. One could say that, OK, let the financial titans on Wall St. take the fall; our “real” economy will survive. Yet, the real economy runs on credit, not cash. Businesses of all sizes need working capital. Their employees and customers buy using plastic. Banks need to borrow from other banks to serve their customers. Governments at all levels need to be able to sell tax anticipation notes in the short-term and bonds to fund public works in the long-term.

The “big boys” include bad apples who have spoiled the barrel of our big economy. They’ve made up mortgages for gullible customers and sold them in packages to a variety of investors, including Fannie and Freddie, other financial companies, and foreign investors. Then there are those – AIG and others, who have supplied insurance against defaults of all kinds of debts, including mortgages. So, the economy turns down, the housing sector takes a dive and the financial dominoes start to fall. AIG, Fannie & Freddie and others have to start covering their bets – to raise capital to honor insurance and other claims as mortgagees default. But they can’t; investors are running scared. Confidence in the whole shebang is undermined when the Federal government gets going in the bailout business. Lehman wakes up to find that perhaps $20 billion of its assets are at risk if AIG fails. Other companies and investors suddenly look at their books to find they’re going to be in trouble if Lehman fails, and so on, domino after domino. So, we’re now looking at what’s called “systemic risk” – the whole financial system at risk of failure, not just a few “big boys.”

It would be hilarious if not such a bad joke -- that we now look to the Federal Government as savior when it has been a central part of a problem building up over many years. It’s a problem of many parts. For example, we can blame the Reagan revolution for a wave of deregulation. We can blame Clinton for enabling banks to relax their standards to help finance more affordable housing. We can dump on good old Alan Greenspan for keeping interest rates too low for too long and looking the other way as the last bubble blew up. We can put lots of blame on the Congress, for ignoring calls to reform Fannie and Freddie, etc. We can lay some on the Bush Administration, too, for ballooning federal spending and growing a huge deficit.

So, we ask again: Why should taxpayers bear the burden? Because we’re all parts of the system-at-risk and, to some extent in some way or another, most of us are part of the problem. How so? – You’re “part of the problem” if you…

* Have built up a sum of credit card debt that exceeds your monthly income;

* Buy a lot of stuff from China (or a lot from Walmart, Hallmark and other stores, most of whose “stuff” is imported from China);

* Have taken on a mortgage and/or other long-term debt beyond your means;

* Don’t pay attention to how Congress is mishandling the public’s business;

* Don’t vote;

* Don’t save, and

* Look for scapegoats rather than take some, even a little, responsibility for what’s going on in your community, state, or country.

The “bailout” is not going to be managed by a George Bailey. Nevertheless, we need to be calling on Congress to support it if it has the following essential features:

>> WE THE PEOPLE (that is, our government) get “equity” (shares of stock or ownership) in companies that appeal to us for help;

>> We buy their troubled loans at a steep discount so, when financial markets recover, we can at least get our money back and perhaps then some;

>> We put lids on the compensation of executives of companies that we help (+ no “golden parachutes”);

>> We regulate investment banks and non-bank financial companies that are not now regulated;

>> We insist upon stringent oversight, transparency and accountability for the whole operation; and

>> We complete the buyout of bad loans and close down the bailout operation ASAP..

As an economist, I would like to add two other features to the mix:

➢ A federal loan insurance option, not just a bailout via buyout option; and

➢ A program that is decentralized, working through the regional Federal Reserve Banks, not out of Washington.

After all, even though we face a national crisis, the geographic spread of bad loans is very uneven. Higher percentages of mortgage loans are “subprime”, for example, in such states as Florida, California and Arizona.

Together, we can beat the crisis. Then let’s record and act upon the lessons of the present so we don’t repeat the past.

PETER BEARSE, Ph.D., International Consulting Economist and Independent Candidate for Congress, NH CD 1, Sept. 28, 2008.