Wednesday, September 24, 2008

Unbridled Arrogance - Paulson and Bernanke go calling on Capitol Hill

Henry Paulson and Ben Bernanke went calling on Capitol Hill yesterday, seeking $700 billion to "stabilize" the financial markets -- in effect, to bail out the industry they both represent. I managed to see some of it while I was eating lunch. Granted, I only got to watch if for about 20 minutes, but there was one exchange between Sen. Sherrod Brown of Ohio and Ben Bernanke that really summed it up for me.

Brown asked Bernanke if we should start demanding that banks issuing a mortgage actually be required to hold on to a percentage of that mortgage. This might mean they actually have a stake in seeing the mortgage repaid, and will therefore abide by more traditional lending practices. Therefore, they wouldn't be anywhere near as likely to issue questionable loans with less-than-reasonable expectation of repayment. Given the manner in which Wall Street's arcane financial mechanisms and flawed debt-benefit analyses did large part to get us into this mess, it did not seem like an unreasonable demand.

Instead, Bernanke completely denigrated the issue. He said something along the lines of, "That's a peripheral issue, and we need instead to concentrate on the main issue right now, which is stabilizing the financial markets [by infusing Wall Street with $700 billion of liquidity, added to the already-stratospheric national debt].

That comment, above all others, highlighted to me the general attitude of the financial industry and their representatives within government. Please note that this does in no way mean I resolve the Congress of their complicity in this mess. To see many of the same Senators who went along with (or championed) the deregulation of the banking industry now standing upon their soapboxes and wagging their finger at Wall Street is nauseating. However, to watch these two men come to Congress and demand they be given full control over $700 billion with no conditions or questions asked is beyond the pale. It is unbridled arrogance.

I was listening to Dr. Alan Chartock of WAMC (NY NPR) yesterday regarding this matter, and he brought up an interesting point of this crisis: the timing. Paulson and Bernanke could have laid out a worse-case scenario for some time now, going all the way back to the Bear Stearns collapse. Signs have been evident for months that a crisis was brewing. Yet, they did nothing. At every step, they assured us that the housing issue could be "contained." Now, only 6 weeks before the election and 1 week before Congress is to recess until after those elections, they came demanding a bailout on their terms. They're literally trying to shove unprecedented powers over the U.S. treasury down Congress' throat. I can't decide if it means that these guys are utterly incompetent, nefariously manipulative or some combination of the two, but those seem to be the choices. Neither gives me a good feeling when it comes to Congress issuing a bailout package under control of the same jokers who screwed things up in the first place.

I also can't help but feel that the only way out of this crisis requires that we actually "back up" a good bit before choosing alternate economic arrangements more in touch with reality and actual value than our current house-of-cards designed by the financial services industry. Our money seems to be based upon little more than debt right now. Taking on more debt will only make that money worth less (or, eventually worthless) and pushing the reckoning a little further into the horizon. Much of this debt, I believe, is the result of our failing to make difficult choices over the past 25 years. World War II left the U.S. as the unquestioned global economic engine, with roughly half of the world's manufacturing capacity. Europe and Japan were in ruins, and the U.S. got rich selling and lending to the rest of the world. However, this arrangement was a blip on the screen, and it was inevitable for more "balanced" conditions to develop. In order for Europe and Japan to gain a greater share of world output, in meant the U.S. share had to be reduced. This, along with passing the peak of U.S. oil production in 1970, resulted in the economic uncertainty of the 1970s.

Rather than face reality, we chose "morning in America." Rather than voluntarily adjust our material expectations, we embraced the philosophy of Ronald Reagan -- a man that Andrew Bacevich has referred to as the "modern prophet of profligacy." This way meant that business was given a freer hand, especially the financial services industry. Our economic growth became less about making and selling things than making and selling money. As a result, the money supply (and national debt) have turned the exponential corner and are increasing at breakneck speed. Adding so much more debt to a system that is already overextended, especially in a scenario in which nothing of utility is actually produced by that credit, cannot be the answer.

I am well aware that this "backing up" will cause pain across all elements of society. However, I think that the longer we push things off, the harder the fall at the end. And eventually all of this will fall. I feel it is irresponsible to try and push off these kinds of adjustments to my daughter and future generations without making adjustments myself. There's also an element of Schadenfreude at work here -- I think that those same Wall Street cowboys who championed the virtues of the free market over all else when things were looking good for them should be forced to take the same medicine they were always willing to prescribe everyone else. I think that if we're going to be responsible people, we have to be willing to bear some sacrifice in the nearer term. There's no such thing as a free lunch, and wishing won't make this predicament go away.

Dmitry Orlov had an interesting article about the current crisis as well: As usual, Dmitry cuts to the quick in trying to look at long-term effects of the crisis as it is unfolding. One observation of special note is the way in which our creditors now may be driving our central banking policy. For so many years, the U.S. was the one making demands of other nations through the World Bank and IMF. Now, it seems that we are on the receiving end of those demands. I remember Allan Sloane of Fortune Magazine saying something to the same effect on the Charlie Rose show a short time back.

No matter how we slice this thing, it all stinks. I just think that the architects of it should end up with more of that stink splattered on them than those who can least afford to deal with it.

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