I've written some other diaries where I've tried to present a pragmatic perspective - which I think best describes Barack Obama's philosophy of government - and this time I'm going to look at the proposed bailouts of Wall Street financial firms ... and why I think Obama is right to back those bailouts ... with caveats.
More after the fold....
First, on pragmatism itself, as I see it myself and as I see it in Barack Obama's philosophy on government. It comes down to two basic questions:
- Will a given policy help solve a problem, even if only partially or temporarily?
- Is it possible? Can it be enacted and implemented effectively?
With those questions in mind, let's look at the Wall Street bailouts proposed by Treasury Secretary Paulson and President Bush.
Let me first say that part of me resents the bailouts. My 'portfolio' - my home - has lost 30% of its base value in the past year. Its market price is exactly what I paid for it, 10 years ago. (Its net value is a bit higher as I've paid down some principal over that time.) I don't own any other investments. My 'portfolio' is my home. Its base value has plummeted during the housing crisis, and nobody in D.C. is falling over themselves to bail me out.
Yet they're all a'twitter to bail out Wall Street financial firms. The Dow Jones Index has lost about 25% of its value in the past year, and I'm told the financial sector is nearer to 30%. About like my home. So why do they get bailed out, but I don't?
That's the emotional part of me, the part that screams out "This is not fair!!!! What about me!?!?"
However, the analytical part of me recognizes there is a very real and significant difference between my 'portfolio' and a stock portfolio. The market price of my home affects one household: mine. Yes, I know that if assessed property values collapse, that shrinks the local property tax base and thus squezes my city's and county's budgets. But I'm not holding my breath waiting for that downward assessment. The larger point is, the market price of my home doesn't affect or reflect capital flow in the overall market.
A stock price does, especially for major financial institutions.
Any business larger than the tiniest mom'n'pop relies on the smooth flow of capital for its existence. And once you get up to even a medium-sized business, lines of credit, so-called "revolvers," are vital. Businesses have regular expenses - mortgage or rent, utilities, employees' salaries, supplies, etc. - and many are fixed-date or pay-as-you-go costs. You pay your employees on the 2nd and 4th Friday of the month, period. Your rent is due at the first of the month, period. You pay for office supplies as you buy them, period.
The problem is, customers don't pay you when you need the money. They pay, if they pay, when they buy your products or services. You may rely on a handful of big orders each year. Your customers may pay late. But you still have to meet your fixed-date and pay-as-you-go costs. How do you do that?
"Revolvers."
They are, essentially, corporate credit cards. For many small businesses, it is a corporate credit card. For larger businesses, it's more likely a line of credit with a major lender. Like ... say ... the ones on the edge of bankruptcy this past week....
If we simply say "you screwed up; you're screwed" - as the market says to us as individuals - their response is to stop lending money out and start demanding payment from those who owe them. They respond exactly as any responsible household would: stop spending, make damn sure you get paid. The difference is ...
... if they shut down those "revolvers," the entire economy shudders to a very fast, very painful halt. As Paul Krugman explained on Rachel Maddow last night, that scenario isn't 1929 (the stock market collapse). That's 1932, when the credit collapse forced thousands of businesses to close up and left millions of Americans unemployed. With no income or credit, those millions of unemployed then default on their mortgages and stop buying goods, putting even more downward pressure on the economy. At the bottom of that hole lies a John Steinbeck novel none of us wanted to read in high school, let alone live out in adulthood.
I've no plans to sell my home right now, so while it's lost 30% of its base value, that's a figure on a real estate estimate. But a 30% loss in value for a major financial institution like AIG is a prologue to The Grapes of Wrath.
So yes, We The People must somehow keep the capital flow markets afloat, despite the many and manifest structural flaws in our economy, until we can repair those structural flaws. We turn to the Paulson plan and ask:
- Will the Paulson plan help sustain the financial market, even if only partially or temporarily?
- Is the Paulson plan possible? Can it be enacted and implemented effectively?
The answers, for me and apparently for Barack Obama, are "Yes, if...."
And that "if..." is critical.
Simply buying up these firms' "illiquid assets" (translation: junk they can't sell because no one else will buy it) is at best only a trivial and momentary fix. Indeed, that alone does more harm than good, because it rewards ill-conceived business decisions. We The People buy the mistakes and They The Wealthy get to keep profitable assets. Socialized loss and privatized profit is not a recipe for a sound economy.
As Barack Obama said, there must be strings attached. Bailouts must be pegged to stricter regulation, so those financial "wizards" don't try to cast the same spells again. The Pluck Gold From Thin Air spell doesn't work. If they're allowed to repeat it, it's just Pluck Money From Taxpayers' Pockets. And since We The People are footing the bill, it's absurd to argue that We The People can't "interfere."
As Obama said, we also must ensure that these bailouts work for Main Street and not just Wall Street. Bailouts must be carefully targeted to protect the flow of capital for ordinary businesses, not merely guarantee the profits of financial speculators.
As Obama said, we must ensure these bailouts are seen for the temporary fix they are. The many and manifest structural flaws in our economy - our loss of real production in manufacturing, non-competitive labor costs due to our broken health insurance system, the risk premiums arising from our dependence on Persian Gulf oil, and our mountain of debt both public and private - will not be fixed by this bailout. We'll have to deal with those structural problems with tangible and effective policies, and we'll have less capital to implement those policies because of these bailouts.
Finally, as Obama said, the bailout plan must be viewed and implemented in the context of a global financial market. We must consult with other G20 nations, and where necessary find and implement solutions that will reinforce and support each other, to stop the 20-year international Ponzi Scheme that has become our global financial market. Pluck Gold From Thin Air works no better in Europe, India, or China than it does in the U.S. Part of ending that Ponzi Scheme will be U.S. recognition that the petrodollar monopoly has ended, and that Americans can no longer act as if the rest of the world has no choice but to underwrite our debt.
Obama's four "ifs" - and I agree with them - are the sticking points a pragmatic evaluation of the Paulson plan. I've seen this rabbit go round the bush before, and all to often what happens is that Wall Street gets everything it wants, but somehow none of the strings quite get attached.
If that happens here, if we bail out the financial institutions without Obama's four "ifs," then all we've done is bust the federal budget for a generation, eliminate any chance to fix our health care crisis, reward the "wizards" Pluck Gold From Thin Air spell, bless the 'best' and oppress the rest. That's not just politically wrong. That's immoral.
But if the strings are attached, future generations might look back on 2009 for the United States as we see 1989 for the Soviet Union: the year we abandoned the fundamentally unworkable economic model of laissez fair capitalism and recognized that We The People really do need to take care of each other.
We'll see....