It's the Economy, Dumbass

Unless you’ve spent the last year lost in the arctic wilderness, or comatose, you will have probably followed the gradually mounting economic turmoil in New York and around the country. If you missed it, though, President Bush gave a completely useless Presidential Address, apparently aimed at the nation’s sixth-graders, telling the story of how we got to where we are now and announcing that something must be done. And then he walked off stage.

Notably missing from his address were answers to everyone’s most pressing questions: How much power will be conferred to the position of Treasury Secretary (an appointed position), and will there be oversight? Is buying bad debt really the only option? What will this do the national deficit in the long term? Will there be salary caps on CEO pay? How will this benefit ordinary Americans?

Yesterday, talks at the White House (which hopefully addressed some of the above concerns, amoung others) ended with no decisions, although Mr. Bush optimistically predicts that a deal will be passed anyway.

And then we went to sleep last night to news that JPMorgan Chase plans to purchase Washington Mutual after the FDIC seized it, just another in a growing list of failing banks and finance houses.

So, perhaps the invisible hand needs… a hand.

Despite some opposition (though ironically not from anyone in the “conservative” republican party) most people have conceded that this is, in fact, true. But in what way ought we to intervene? $700 billion taxpayer dollars to buy bad debt and hand out huge severance packages (as the original package prohibited any caps on CEO pay) is not, in my opinion, the way to go. And what about those unanswered questions?

According to the original package, Treasury Secretary Paulson would be given complete control over the bail-out package, and his actions would be “unreviewable.” You read it right, unreviewable. Apparently this administration learned a lesson from the failure of Alberto Gonzales’ “un-recall-able” tact.

And no, buying bad debt is not the only option. Thankfully congress is already planning on buying preferred stock in troubled companies, which can later be sold after the crisis abates. Another option is to take potentially bad assets as collateral against government loans. Companies are still obliged to pay back the loans, but it is they, and not the taxpayer, who is left holding the bag if/when those assets fail.

Still, a lump-sum bail-out would instantly multiply the national deficit, further endangering the value of our currency, and make us increasingly vulnerable to the whims of Sovereign Wealth Funds.

How will this benefit ordinary Americans? Well, we’ll be able to keep buying things we can’t afford. But economic growth that depends too much on a credit market is not actual growth, it’s future growth. The numbers are not real today, they are anticipatory. That is why, in my opinion, a recession might be better in the long run. As with oil prices, less availability of credit will mean fewer people use credit, and honestly, maybe that’s a good thing.

For more on the economy, read WWV’s entry Financial Crisis.