http://www.nytimes.com/2008/09/22/opinion/22krugman.html?th&emc=th
Cash for Trash By PAUL KRUGMAN NY Times: September 21, 2008 Some skeptics are calling Henry Paulson's $700 billion rescue plan for the U.S. financial system "cash for trash." Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq. There's justice in the gibes. Everyone agrees that something major must be done. But Mr. Paulson is demanding extraordinary power for himself - and for his successor - to deploy taxpayers' money on behalf of a plan that, as far as I can see, doesn't make sense. Some are saying that we should simply trust Mr. Paulson, because he's a smart guy who knows what he's doing. But that's only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half - a period during which Mr. Paulson repeatedly declared the financial crisis "contained," and then offered a series of unsuccessful fixes - justifies the belief that he knows what he's doing? He's making it up as he goes along, just like the rest of us. So let's try to think this through for ourselves. I have a four-step view of the financial crisis: 1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities - assets whose value ultimately comes from mortgage payments. 2. These financial losses have left many financial institutions with too little capital - too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years. 3. Because financial institutions have too little capital relative to their debt, they haven't been able or willing to provide the credit the economy needs. 4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the "paradox of deleveraging." The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis? Well, it might - might - break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn't clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital. Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms - and their stockholders and executives - a giant windfall at taxpayer expense. Did I mention that I'm not happy with this plan? The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to - a share in ownership, so that all the gains if the rescue plan works don't go to the people who made the mess in the first place. That's what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It's also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.) But Mr. Paulson insists that he wants a "clean" plan. "Clean," in this context, means a taxpayer-financed bailout with no strings attached - no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review "by any court of law or any administrative agency," and this adds up to an unacceptable proposal. I'm aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad. Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now. But I'd urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don't let yourself be railroaded - if this plan goes through in anything like its current form, we'll all be very sorry in the not-too-distant future. *** http://www.guardian.co.uk/commentisfree/2008/sep/19/marketturmoil.usa Free market ideology is far from finished But with Wall Street rescued by government intervention, there's never been a better time to argue for collective solutions. By Naoni Klein The Guardian (UK) Sept. 19, 2008 Whatever the events of this week mean, nobody should believe the overblown claims that the market crisis signals the death of "free market" ideology. Free market ideology has always been a servant to the interests of capital, and its presence ebbs and flows depending on its usefulness to those interests. During boom times, it's profitable to preach laissez faire, because an absentee government allows speculative bubbles to inflate. When those bubbles burst, the ideology becomes a hindrance, and it goes dormant while big government rides to the rescue. But rest assured: the ideology will come roaring back when the bailouts are done. The massive debts the public is accumulating to bail out the speculators will then become part of a global budget crisis that will be the rationalisation for deep cuts to social programmes, and for a renewed push to privatise what is left of the public sector. We will also be told that our hopes for a green future are, sadly, too costly. What we don't know is how the public will respond. Consider that in North America, everybody under the age of 40 grew up being told that the government can't intervene to improve our lives, that government is the problem not the solution, that laissez faire was the only option. Now, we are suddenly seeing an extremely activist, intensely interventionist government, seemingly willing to do whatever it takes to save investors from themselves. This spectacle necessarily raises the question: if the state can intervene to save corporations that took reckless risks in the housing markets, why can't it intervene to prevent millions of Americans from imminent foreclosure? By the same token, if $85bn can be made instantly available to buy the insurance giant AIG, why is single-payer health care - which would protect Americans from the predatory practices of health-care insurance companies - seemingly such an unattainable dream? And if ever more corporations need taxpayer funds to stay afloat, why can't taxpayers make demands in return - like caps on executive pay, and a guarantee against more job losses? Now that it's clear that governments can indeed act in times of crises, it will become much harder for them to plead powerlessness in the future. Another potential shift has to do with market hopes for future privatisations. For years, the global investment banks have been lobbying politicians for two new markets: one that would come from privatising public pensions and the other that would come from a new wave of privatised or partially privatised roads, bridges and water systems. Both of these dreams have just become much harder to sell: Americans are in no mood to trust more of their individual and collective assets to the reckless gamblers on Wall Street, especially because it seems more than likely that taxpayers will have to pay to buy back their own assets when the next bubble bursts. With the World Trade Organisation talks off the rails, this crisis could also be a catalyst for a radically alternative approach to regulating world markets and financial systems. Already, we are seeing a move towards "food sovereignty" in the developing world, rather than leaving access to food to the whims of commodity traders. The time may finally have come for ideas like taxing trading, which would slow speculative investment, as well as other global capital controls. And now that nationalisation is not a dirty word, the oil and gas companies should watch out: someone needs to pay for the shift to a greener future, and it makes most sense for the bulk of the funds to come from the highly profitable sector that is most responsible for our climate crisis. It certainly makes more sense than creating another dangerous bubble in carbon trading. But the crisis we are seeing calls for even deeper changes than that. The reason these junk loans were allowed to proliferate was not just because the regulators didn't understand the risk. It is because we have an economic system that measures our collective health based exclusively on GDP growth. So long as the junk loans were fuelling economic growth, our governments actively supported them. So what is really being called into question by the crisis is the unquestioned commitment to growth at all costs. Where this crisis should lead us is to a radically different way for our societies to measure health and progress. None of this, however, will happen without huge public pressure placed on politicians in this key period. And not polite lobbying but a return to the streets and the kind of direct action that ushered in the New Deal in the 1930s. Without it, there will be superficial changes and a return, as quickly as possible, to business as usual. ------------------------------------ --------------------------------------------------------------------------- LAAMN: Los Angeles Alternative Media Network --------------------------------------------------------------------------- Unsubscribe: <mailto:[EMAIL PROTECTED]> --------------------------------------------------------------------------- Subscribe: <mailto:[EMAIL PROTECTED]> --------------------------------------------------------------------------- Digest: <mailto:[EMAIL PROTECTED]> --------------------------------------------------------------------------- Help: <mailto:[EMAIL PROTECTED]> --------------------------------------------------------------------------- Post: <mailto:[EMAIL PROTECTED]> --------------------------------------------------------------------------- Archive1: <http://www.egroups.com/messages/laamn> --------------------------------------------------------------------------- Archive2: <http://www.mail-archive.com/[EMAIL PROTECTED]> --------------------------------------------------------------------------- Yahoo! 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