Wednesday, March 12, 2008

No Bailouts

The National Lawyers’ Guild used to have a T-shirt that quoted Shakespeare: “The first thing we do is kill all the lawyers.” It was a pointed tongue-in-cheek comment about the way some lawyers use the law to block social justice and change. Unfortunately, what was first a social observation, and later a leftist insight into the way entrenched interests use the law, has become a club with which to bash all lawyers.

Regardless, the recent moves by the Fed to protect banks against their own bad investment decisions put me in mind of the Shakespeare quote. As the current recession gathers momentum, what we need is a priority list for government action. Maybe lead the list off with, “the first thing we do is, we don’t bailout business.”

One of the Fed’s moves involves loaning investment banks up to $200 billion and allows banks to secure the loans by pledging securities they hold. Supposedly, the banks’ pledged collateral will be their most highly rated, mortgage-backed securities. AAA-rated, we are told.

On the news of the Fed’s move, the Dow-Jones average of industrial stocks achieved its largest single-day increase in five years. Despite appearances, the Washington Post’s Steven Pearlstein says this isn’t just a “bailout for Wall Street (A Bailout. For Everyone, Post, March 12).” Pearlstein says the move will help us all.

"…it is also a bailout…meant to prevent a financial and economic meltdown that drags everyone down with it,” Pearlstein writes, though he leaves out the specific ways in which working families will benefit.

For a different perspective on bailouts check Dean Baker’s book, “The Conservative Nanny State.” Baker, who is co-director of the Center for Economic and Policy Research (CEPR), argues that the government, contrary to popular belief, repeatedly uses its power to help banks and other businesses avoid the consequences of risk.

“…in a market economy lenders take risks when they make a loan [or buy mortgage-backed securities]. They should, in principle, understand this fact. Certainly, the highly compensated corporate executives that manage large banks and other financial institutions should understand that they take risks when they make their loans [or investments],” Baker writes.

That it is necessary for Baker to make the point at all, in a chapter about bankruptcy, suggests that corporations operating in our “free market” economy understand perfectly well that a government bailout is always a good possibility. The message cloaking the substantial benefits of these corporate bailout policies has been consistent since the phrase “what’s good for General Motors is good for America,” entered the vernacular. Pearlstein’s comments are merely the latest refinement.

But it seems more than possible that AAA-rated securities might not be that good, at all. That’s been the experience recently as even security-rating services have come under fire for their practices. That means the Fed’s decision has put the government in the position of guaranteeing $200 billion in investments that might be liquidated for less sometime in the future.

If jobs are at stake here, then for $200 billion the government could extend unemployment benefits, expand food stamp programs and begin investing in different jobs, like new and rebuilt mass transit, bridge repair and renewable energy. But the first thing we do is, we don’t bailout business.

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