The apparent failure of the Obama administration’s first attempts to restore economic confidence gives us the opportunity to look at the whole crisis afresh.
The first thing we need to do, as we reassess the crisis, is realize the extent to which the country was horribly and unimaginably failed by its entire public- and private-sector leadership. The Clinton and George W. Bush administrations, and their Congresses, discouraged savings; legislated non-commercial mortgages in the private sector (a political free ride, as both parties boasted of increasing home ownership at no cost to the taxpayers); raised the ceiling on investment-bank debt leverage on unsecured assets to 30 to one; and acquiesced while consumers piled up debt that enriched Chinese exporters of cheap goods, European and Japanese exporters of luxury goods, and the oil-exporting cartel, including Venezuela and (indirectly) Iran.
The Chinese and Japanese bought over $1 trillion of U.S. Treasury obligations to help finance a completely unsustainable U.S. current-account deficit of over 5 percent of GDP. It was a less morbid version of Lenin’s prediction that the capitalists were so greedy and stupid they would sell him the rope he would use to hang them. The U.S. was the world’s happy bovine, until it became clear that — in the words of President Bush’s customarily eloquent attempt to rally public and congressional opinion — “the sucker could go down.”
The political class squiggled through the election raving about greed and pointing with trembling rage at Wall Street. The financial community is now in a torpor, shattered by the debacle and scarcely able to point out the unbroken, bipartisan, equal-opportunity sequence of government bungling that made this fiasco possible and then made it worse. At every stage, right up to the Pelosian social-policy slush fund of a stimulus package (e.g., stimulus as condoms), almost nothing has been done correctly by government except Federal Reserve chairman Ben Bernanke’s replenishment of the monetary base to fight deflation. As the crisis grew, Treasury Secretary Henry Paulson bustled disturbingly about — saving some crumbling institutions but not others, and submitting half-baked blank-check recovery schemes to skeptical members of Congress. The new Treasury secretary, Timothy Geithner, who was one of the authors of those initiatives, used the same peek-a-boo style in unveiling a vague outline of his banking proposals. It won’t work. Last week’s initiative on non-performing mortgages was much more promising.
The new attorney general, Eric Holder, who tried unsuccessfully to deny accused people the benefit of corporate legal indemnities, has already indicated he will indict everyone he can on Wall Street. Considering the malleability of grand juries and the erosion of due process in this country, this means that virtually everyone is vulnerable, and that the political class intends to win the blame game with business by imprisoning the other side’s debating team. But since almost everyone is to blame, the president would do better to avoid blaming anyone.
He should use FDR’s playbook and stop telling the country how terrible everything is. Half of economics is psychology and he should say that there is a serious, but manageable, problem, that fear and panic should be avoided as the country, united, works on his plan of action toward the solution that awaits. He has to inspire confidence, and to do so must seem adequately confident. Here are some ideas.
First of all, the banking bill should segregate non-performing assets in each bank in a long-term work-out account. (President Bush should never have allowed the media to call the original Bernanke-Paulson proposal a bailout.) Eventually, the taxpayers should make a large profit from the government’s acquisition of bank shares and warrants at prices that reflect the erosion in value of these assets. If politically advisable, these shares and warrants could be prorated out to taxpayers.
Also, the president must encourage people to spend rationally, as FDR persuaded them in 1933 to take their money out from under the mattress and put it back in the bank. He and his officials must propel the banks, by the scruff of the neck and the small of the back, to return to sensible lending. What we have now is capital paralysis provoked by shell-shock and (to take a more optimistic view) conscientious self-reflection. Even Warren Buffett’s predictable and folksy aphorisms are not resonating, any more than did his inane request to have his taxes raised, before his paper loss of over $10 billion.
Taxes on capital gains and institutional interest income should be reduced, to facilitate lending. The government is right to refinance all principal-family-residential mortgages in need of it. Most of those in danger of eviction are victims of what amounted to a government sting operation: Fannie, Freddie, and banking legislation enticed the public and when the house of cards started to come down, the insiders–such as the egregious Richard Breeden (special counsel at Fannie, former SEC chairman, Bush family fixer, chief corporate-governance poseur, and unsuccessful hedge-fund operator)–slunk back into the undergrowth, under cover of the legislators’ banshee-like divertissement about the evils of filthy lucre.