What are we to make of the Congressional rejection of the Paulson proposal? The politics is simple: elections are a rare moment of accountability in our political process and all 435 members of the House of Representatives are up for re-election in a matter of weeks. The Bush administration has lost the confidence of the American people, and so has Wall Street.
Those who created the problem are now the doctors offering the prescriptions. A little while ago, we were told everything was fine. Then, less than six months ago, we were told that the economy was on the mend. Now we are told the patient needs a massive transfusion, but everyone can see that the patient is suffering from internal bleeding; in California, the number of foreclosures may already be outpacing voluntary sales. Yet nothing is being done to stem the haemorrhaging.
While the president says the economy faces the risk of economic meltdown, he threatens to veto a stimulus package which would create jobs — and he seems particularly adamant about a stimulus package that includes improved unemployment benefits. Traditionally, this is done when there is a threat of an economic downturn; if the downturn doesn’t materialise, it doesn’t cost anything. And while the administration and Wall Street promise this is just a temporary loan, not a bail-out, there was strong opposition to making the financial industry pay for any losses. Why would that be, if they are so sure that there won’t be losses?
The rescue bill left enormous discretion to an administration on the wane, an administration which has shown unparalleled incompetence, an administration which even tried to politicise the attorney general’s office. Americans worry that there will be political favourites among the recipients of the hundreds of billions of dollars; that treasury secretary Hank Paulson seemed tough on Lehman but reversed course when his old firm Goldman Sachs was at risk is hardly reassuring.Corporate welfarism
If the administration really thought the problems were as severe as claimed, shouldn’t they have put forward a bill that was less outrageous? Did they really think that Americans would swallow giving them authority to spend $700b, without oversight or judicial review, in a bill of a few pages? Normally, if you think there is a crisis, you try to forge a compromise with those who see the world differently — workers who worry about the loss of jobs and homeowners who worry about the risk of foreclosure.
Americans have lost faith not only in the administration, but in its economic philosophy: a new corporate welfarism masquerading behind free market ideology; another version of trickle-down economics, where hundreds of billions to Wall Street that caused the problem was supposed to somehow trickle down to help ordinary Americans. Trickle-down hasn’t been working well in America over the past eight years.
The very assumption that the rescue plan has to help is suspect. After all, the IMF and U.S. treasury bail-outs for Wall Street 10 years ago in Korea, Thailand, Indonesia, Brazil, Russia and Argentina didn’t work for those countries, although it did enable Wall Street to get back most of its money. The taxpayers in these other poor countries picked up the tab for the financial markets’ mistakes. This time, it is American taxpayers who are being asked to pick up the tab. And that’s the difference. For all the rhetoric about democracy and good governance, the citizens in those countries didn’t really get a chance to vote on the bail-outs. Had they, most would have suffered the same fortune as Paulson’s.
There is, in fact, a widespread consensus among economists about what should be done. The economy is weak and would remain so even with a good rescue plan. That is why there is a need for a strong stimulus. The February stimulus package was badly designed and its anaemic effects offset by soaring oil and food prices. Given the enormous increase in the deficit during the past seven years (from $5.7 billion to over $9 trillion — and that doesn’t include the bills yet to be paid for the Iraq and Afghanistan wars) we have to be sure that we get the biggest bang for the buck. We need increased unemployment benefits and aid to states and localities, who otherwise will be forced to cut back on expenditures, depressing the economy further. We need more investment in both the public and private sectors.
The fundamental problem with the financial system is that there have been large losses. Loans were made to people who couldn’t repay. They were made on the basis of collateral whose value was inflated by a bubble. That bubble has burst and the collateral is now worth less than the loan. The experts believe real estate prices have still a way to fall. This is not a matter of market confidence. This is a matter of market reality. Paulson would have us believe otherwise, but the American people know better. The fact that he and Federal Reserve chairman Ben Bernanke don’t seem to grasp these realities undermines confidence that they know what they are doing.
In environmental economics, there is a basic concept called the polluter pays principle. It is a matter of fairness, but also of efficiency. Wall Street has polluted our economy with toxic mortgages. It should now pay for the cleanup.
What is so sad about this whole debacle is that is was predictable. Predicatable and avoidable. Perhaps Paulson and the administration believed that they could bamboozle Americans into doing whatever they asked. But Americans had been bamboozled before — into signing a blank cheque for the Iraq war.
A sad day for Wall Street, but it may be a glorious day for democracy. Hopefully Congress will now devise a plan that is not based on trickle-down economics. A plan that identifies the real sources of the problem and does something about them — a real stimulus to the economy, a real programme to stem the flood of foreclosures and a transparent programme for filling the holes in bank balance sheets. A plan that assures U.S. taxpayers the costs will be borne by those who created the problem. Accountability means paying for the full consequences for one’s actions — and the financial system has much to account for. — © Guardian Newspapers Limited, 2008
(Joseph E. Stiglitz is university professor at Columbia University and recipient of the Nobel prize in 2001. He was chief economist at the World Bank at the time of the last global financial crisis.)