The fact that something needs to be done doesn't mean that this was the right thing, writes JACK WATERFORD
“THIS is a huge cow patty with a piece of marshmallow stuck in the middle of it, and I am not going to eat that cow patty,” declared Paul Broun, a Republican congressman from Georgia shortly before he, and 227 others Republicans and Democrats, voted against the Bush Administration’s first $US700 billion ($A846 billion) proposal, which it had claimed would lead America, and the world, out of economic crisis. Broun’s objections were doctrinaire - opposing government intervention in the marketplace. But both his political, and perhaps his economic, instincts may have been right, even if the immediate aftermath prompted a dramatic decline in stock prices in America and around the world. Political in both the short and long terms. The government’s bail-out measures are enormously unpopular with the American electorate, and the election is only a month away. The electorate blames Wall Street and the big banks and brokers for the crisis, and sees the bail-out as a means of extricating them from the cow patty without doing much to repair the economic damage they have caused. And, while the Administration’s proposals had been slightly modified by both Democratic and Republican congressmen and congresswomen - hence the marshmallow in the cow patty - adoption of the proposals would have involved an extraordinary abdication of power by a parliament. In effect, the legislators were being asked to sign the biggest blank cheque in history, with virtually no riding orders, accountability controls or even much in the way of a storyline about how it would be spent. Instead they were given gloom and predictions of diabolical catastrophe, not only for America but for the global trading system. President George W.Bush and Treasury Secretary Henry Paulson were asking for virtually unlimited power. They insisted they needed to be able to act fast, and invited panic about what would happen if they were not given the resources for which they were asking. They wanted $250 billion immediately. They wanted the president to be given authority to spend another $100 billion at his own discretion. Access to the remaining $350 billion would have involved further consultation with, or notification of, Congress, but the authority to spend or commit it would have come from yesterday’s legislation. The marshmallow concerned pious declarations about the government’s seeking to recoup the money in due course, pretending to restrain those it would be helping from continuing to reward themselves with fabulous salaries, bonuses and “golden parachutes,” and giving the appearance of extending the Federal Reserve’s powers to take equity as security for loans, or otherwise pump money and credit into the system. In fact, the Federal Reserve already has most of the powers it needs, and without congressional leave, even if the political will to exercise those powers may now be constrained by Congress’s explicit refusal of a parliamentary appropriation. Indeed, even as the Fed was seeking congressional approval, it was completing arrangements with central banks around the world (without any such approval) to release hundreds of billions of dollars into world trading systems to prop up liquidity. A time may soon be reached when the Fed has, in effect, exhausted its existing reserves, exhausted the willingness of those with cash to lend it on the security of US Treasury bills, or, perhaps faces a few exasperated nations, such as China, no longer willing to maintain their reserves in US dollars. But that point has not been reached yet, and those who speculate that it may would be well aware that, should things reach this point, global and local trade will be almost frozen, in all probability with equally diabolical consequences for any other currency or means of exchange. US history is replete with examples of the folly of congressional blank cheques, especially ones actuated by panic. There are already commentators, from both the left and the right, very critical of Congress’s refusal to authorise the bail-out. Most suggest that Democrats succumbed to populism and short-term political pressures, and failed to do the responsible thing. By contrast, the Republican refuseniks were accused of being blinded by their economic libertarianism, even as all of the errors and deficiencies of unrestrained and unregulated capitalism were manifest and the economy was in ruins, with government intervention essential. No doubt, in due course, some will remember the policy paralysis of Herbert Hoover and his refusal to intervene in the markets after the crash 79 years ago this month, precipitating what we would now call the Keynesian policies of the Roosevelt era. Few would doubt the American economy needs a massive infusion of both liquidity and confidence. That might involve public spending of $700 billion or more, some of it at short notice in response to events. But the mere fact something needs to be done is by no means proof that this something is the right deed. Behind populist reaction against the bail-out, for example, is a public realisation that most of the money “lost” so far has not been lost by shareholders or great speculators but by the lower half of the American electorate. This fact is most patently reflected in uneconomic mortgages, but it will soon show in the lost value of workers’ superannuation assets and personal savings. The bail-out plan would have given the administration power to buy out non-performing mortgages (presumably at a massive but still, in the circumstances, disadvantageous discount). Let it nationalise some tottering institutions, stanch some of the haemorrhages and in the process renew confidence, local and international, in the economy, and one could imagine circumstances in which the administration could ultimately (say, within a decade) hope to make a net profit from its market operations. But cynical voters have noticed that, while banks are being rescued, consumers in mortgage trouble are not. Instead, the banks are being invited to off-load their bad debts on to government. It is to be the one to exercise forbearance, and, if needs be, to allow renegotiation of loans the better to reflect current values. The initial beneficiaries, of course, are of just the class who have benefited enormously from regulatory policies, consciously derelict legal, prudential and ethical controls and, not coincidentally, massive tax cuts from the Bush Administration. Perhaps the crisis is such that urgent action is required, rather than a mere focus on the moral, legal and ethical responsibility of those involved, but the instinct of a taxpayer not to throw more good money after bad is reasonable enough. And there is more than that to criticise. The architects of the plan have consciously sought to separate it from other medicine the economy urgently needs. First, of course, on government deficits and trade deficits, which have blown out enormously under the Bush regime and, whether or not partly forced upon him by September 11, to the enormous enrichment of his cronies. Moreover, a critical part of the creation of the real estate bubble that precipitated this crisis was the spare cash rolling around the system because of government’s failure to invest in declining infrastructure. This unspent money was counted as a saving, a virtue, a contribution to “smaller government.” If Australia stands reasonably accused of letting its infrastructure deteriorate over the past twenty years, chiefly in the name of fake government savings, the problem of the United States is far worse - a point best made by the disaster at New Orleans and the ineptitude of the government’s response to it. Programs to fix up some of the problems, spent intelligently by region, could do much of the pump-priming, and creation of liquidity, that the economy so badly needs. But this is, it seems, anathema to those whose vision of their “achievement” over the years of neoliberalism is of a massive reduction in the size of services delivered to the community . Much of the smaller-government achievement conspicuously excluding defence spending has been financed by sucking in money from outside the US, even as the incomes of the well-off increased exponentially. The serendipitous consequence, of course, is that we all the rest of the world have almost as much interest as do ordinary Americans in getting their economy out of their hole.
• Jack Waterford is Editor-at-Large of the Canberra Times, where this article first appeared.