The world has changed. The market fundamentalism that has dominated our economics over last three decades has been unmasked as a sham, deemed useless by the guardian of the integrity of finance itself, the Federal Reserve.
Without a vote of the Congress or a public debate, the Bush administration and the Federal Reserve have made government the guarantor of the shadow banking system – the unregulated, unhinged hedge funds and investment houses whose compulsive excesses now threaten the global economy. They say necessity is the mother of invention, but we seen only a part of the new machine, not surprisingly, the part that buttresses Wall Street. They have scrambled to put this together in an emergency, behind closed doors, without a hint of the necessary regulatory changes that must rationally accompany such guarantees. That is what the fight in the coming months will surely be about.
As the article below by David Wessel of the Wall Street Journal summarizes, the intervention puts at risk hundreds of billions of taxpayer dollars.
It also transforms the economic debate. It is inconceivable that taxpayers should be asked to bail out private buccaneer speculators without enforcing limits on their speculation – capital reserves, limits on what gambles they can take, oversight, transparency, new restrictions on their pay packages to remove the current multi-million dollar personal incentives to invent new Penza schemes and scams.
The shadow banking system now must be brought out of the shadows. After all we are constantly told that finance serves the economy, and the market system is the best means to solve our social goals. It feels very uncomfortable when our servant's servant becomes our master's master as Wall Street has been permitted to become in America in recent years by contribution- hungry elected officials.
As Barack Obama noted in his speech yesterday, the deregulation that fostered this folly was supported by both parties. It began under Jimmy Carter, accelerated under Ronald Reagan, went into hyper speed under Bill Clinton, and spiraled into catastrophe under George Bush. The freedom to gamble with other peoples’ money has been protected by lavish campaign contributions and powerful lobbies. These financial buccaneers have treated the laws and rules that govern our financial markets like just one more asset to be bought and sold. They have been unabashed in their arrogant abuse of power, rigging the rules and daring the world to stop them. A particularly audacious example occurred only last year when a concerted lobby campaign convinced the Democratic majority in the Senate to sustain the tax dodge that enables billionaire hedge fund operators to pay a lower tax rate than their secretaries.
This cannot continue. They ask to pocket their profits and have taxpayers protect them from their losses. That offends the principles of both democracy and the market. If they are too big to fail – if their failure will bring down the entire economy – then they are also too big to gamble on their own. They must be regulated – or perhaps nationalized, as the British have just done with one of their leading banks. After all they are asking to nationalize their losses. Why not some of their profits too?
This debate must be accessible to, and reflect the concerns of, citizens. It cannot be the exclusive province of so-called experts, Wall Street operators, economists and legislators. Too often, Wall Street manages to profit having the party and then make a bundle from the government in cleaning up the mess as they socialize the losses that they created.
It is important to understand how reckless Wall Street has been. They have not only victimized the American people through recession and bailouts. Their recklessness threatens to blow up their own cherished role as well. They have damaged the international reputation of the U.S. dollar, turning the world's reserve currency into the equivalent of a junk bond. The excesses of their hubris-driven repackaging of assets has muddied the U.S. credit allocation process and accelerated the US decline as the financial center of world commerce. Their sacred cow of "free trade" is unlikely to withstand the pressure of a prolonged slump. Wall Street is compulsively consuming itself.
We are going to follow this debate closely at CAF. It will be a constant feature of this blog. We’ll call on the best progressive economists and analysts to break it down. We’ll collect the best documents so you can follow the debate. And we’ll be driving campaigns to make certain that the public doesn’t once more get stuck with the bill for the bankers’ party, with no assurances that the reckless structure of finance has been repaired.
David Wessel provides good summary of where we are below.