For a change, it looks like George W. Bush did the right thing. Not that he had a lot of choice.
We came remarkably close earlier this week to a repeat of the events of 1929. Bush, whose legacy is already about as bad as it could be, along with his two biggest economic appointees-- Federal Reserve Chief Ben Bernanke and Treasury Secretary Henry Paulson, was faced with a stark choice between being Herbert Hoover or Franklin Roosevelt.
He and Bernanke and Paulson picked Roosevelt and moved to have the Federal Government aggressively intervene in the banking system to stave off a collapse. Things had gotten so bad at one point this week that investors were actually paying money to park their investments in safe treasury bonds, the first time since the great Depression that the effective interest rate on any kind of federal note had been negative.
A lot of pro-deregulation market oriented conservatives howled at the price tag of the federal bailout-- maybe as high as a trillion dollars. It joins the Iraq war and the medicare prescription drug handout to the pharmaceutical industry as trillion dollar debt busters that the Bush administration has given us. Unlike the first two however this one is absolutely necessary. Without it, well we'd be stuck in 1929 and all that that would augur for a very bleak future.
That isn't to say though that we should just let things go on as business as usual.
To start with, there is some outrage to go around. For instance, here are some golden parachute numbers, for CEO's of firms that failed monumentally:
Stanley O'Neill, Merrill Lynch: $161 million.
Jimmy Cayne, Bear Stearns: $61.3 million (plus another $4 million plus in J.P. Morgan stock, the company that ended up absorbing Bear Stearns.)
Michael Perry, IndyMac Bank: $37.5 million
Richard Fuld, Lehman Brothers: $22 million
Robert Willumstad (AIG July-Sept. 2008): $7 million
Martin Sullivan (AIG 2005-2008): $47 million
I'm sure I could run any bank into the ground as well as these guys did. Why can't I get that kind of cash?
Here is the good golden parachute news:
Daniel Mudd, Fannie Mae: $0
Richard Syron, Freddie Mac: $0.
Federal regulators, thanks to the hybrid nature of the companies to begin with, were able to ensure that Mudd's and Syron's golden parachutes failed to deploy. Chalk up two big wins for Federal control.
Beyond that, it is abundantly clear that the 'free market' that American conservatives like to sing about, really means that the rewards are private, but the risk is the responsiblity of all of us. Some hardcore ideologues on the right have been speaking out against the bailouts this week suggesting that we should just let the whole system fail and come crashing down. I guess they wouldn't have a problem with us going back to the 1930's when millions of ordinary people lived under bridges and ate boiled weeds for dinner but I do have a problem with that. Rather, I believe that since ultimately we as a society are on the hook for the long term stability of our economy anyway, and that the economy is tied to the stability of these banks, we should share in the rewards that come with this risk.
I don't necessarily mean through higher taxes either. Some are right that if you tax wealth then the wealthy will find and exploit loopholes to escape taxes. That's not a reason to give up on getting them to pay their fair share in taxes but it does mean that we can't expect to count on taxation of companies who can certainly employ enough lobbyists to create all the loopholes they need as the only answer here.
Nor does regulation provide the answer (though I do agree that we will need to take a look at tightening regulation). We already know that even as these institutions and banks were failing they employed armies of lobbyists and made millions of dollars in campaign contributions all over Washington so it's a fact that regulations can be skirted or rewritten over time (as institutional memories of why they were there in the first place fade).
And yeah, I'd love to see Washington ban corporate lobbyists but you and I both know that isn't going to happen anytime soon, or if it does there will be some loophole left open so they can still funnel money to candidates. So let's talk about practical solutions here, not pie-in-the-sky pledges to 'change Washington' as a way to prevent another crisis originating on Wall Street.
No, what I propose is very simple and straightforward. If the Federal Government is going to effectively back up institutions and banks that make risky decisions and then step in and absorb the fallout when the risks become reality, then we (collectively, as taxpayers) should share in the rewards. Let the Treasury Department hang onto a share-- say in the 10-20% range-- of stock in the company, and mandate that this stock remain under the control of the Federal government for at least 20 years after any bailout. That way if and when the company regains profitability then We the People will get a direct return on our 'investment' (made as it was under the darkest of circumstances.)
This may be criticized as 'socialistic' but let's face it-- the bailout and takeover of Freddie Mac, Fannie Mae and AIG are nothing else. Maintaining a 20% federal ownership of companies like these actually would achieve three goals: 1. it would over time pay us all back as a society so that we wouldn't just be paying out good money for bad, 2. it would help stabilize the share price as the company clawed its way back, and 3. while 20% isn't a majority and the major decisions would ultimately be left to the rest of the investors and the CEO they appoint, it's a big enough piece that the government would have a lot of input. Treasury Secretaries are by nature a cautious bunch so having a representative of the treasury department representing taxpayer interests in a corporate boardroom meeting might influence those decisions in a more cautious direction but clearly that isn't such a bad thing.
And then once 20 years are past, the treasury department could slowly release our shares onto the open market, using the profits to pay off our own national debt or to pay for other spending (possibly reducing the need to collect taxes from the rest of us.)