Wednesday, October 01, 2008
Both Barack Obama and John McCain disagree, and, as noted earlier, they turned their presidential campaign appearances into opportunities to advocate for a bailout on terms dictated by Wall Street. Just an hour or two ago, Obama spoke on the Senate floor in support of the bailout in his typically timorous style. Clinton didn't make his abandonment of the lower and middle class fully evident until he pushed through NAFTA almost two years into his presidency in the fall of 1994. Obama is making it obvious before he even enters the White House. No need to worry, though, the left is going to pressure him to do the right thing as soon as he has won the election.
There is, in fact, a widespread consensus among economists about what should be done. The economy is weak, and would remain so even with a good rescue plan. That is why there is a need for a strong stimulus. The February stimulus package was badly designed, and its anaemic effects offset by soaring oil and food prices. Given the enormous increase in the deficit during the past seven years (from $5.7bn to over $9 trillion - and that doesn't include the bills yet to be paid for the Iraq and Afghanistan wars) we have to be sure that we get the biggest bang for the buck. We need increased unemployment benefits, and aid to states and localities, which otherwise will be forced to cut back on spending, depressing the economy further. We need more investment in both the public and private sectors.
The fundamental problem with the financial system is that there have been large losses. Loans were made to people who couldn't repay. They were made on the basis of collateral whose value was inflated by a bubble. That bubble has burst, and the collateral is now worth less than the loan. The experts believe real estate prices have still a way to fall. This is not a matter of market confidence. This is a matter of market reality. Paulson would have us believe otherwise, but the American people know better. The fact that he and Federal Reserve chairman Ben Bernanke don't seem to grasp these realities undermines confidence that they know what they are doing.
In environmental economics, there is a basic concept called the polluter pays principle. It is a matter of fairness, but also of efficiency. Wall Street has polluted our economy with toxic mortgages. It should now pay for the cleanup.
What is so sad about this whole debacle is that it was predictable. Predicatable and avoidable. Perhaps Paulson and the administration believed that they could bamboozle Americans into doing whatever they asked. But Americans had been bamboozled before - into signing a blank cheque for the Iraq war.