Oct
1
Metamorphosis of the bailout
Filed Under Sunrise on KGMB9
As I write this, the plan to rescue Wall Street and restore liquidity to world credit markets is in its third edition and still may not pass, because Americans don’t know what it means to “restore liquidity to world credit markets” and it sounds like something they don’t give a damn about.
This feeling has been intensified by the fact that the first plan didn’t get even to a vote, and the second plan got to a vote and was defeated, and Wall Street still stands, even if the Dow did lose a thousand points over the past four weeks. It has also been nurtured by congressmen in close re-election races, who have reinforced the no-nothing thinking by taking public stands in accord with the mail they’re getting.
The third edition of the plan, set for a Thursday vote by a recalcitrant House after certain passage Wednesday evening by senators, is a Christmas trees of financial ornaments for middle-class consumers and the business community. Other media reports have read this as a package of concessions to rebel Republicans and rebel Democrats in the House. I read it as an attempt to appease middle-class Americans and the business community and change the tenor of the mail those congressmen are getting.
In other words, most of the rebel no-voters are struggling to understand the machinery of global financial markets and responding mostly to what their constituents have been telling them.
Wall Streeters, meanwhile, remain utterly convinced that if the average American “understood” she or he would happily support the bailout, a little like the asphalt huggers who say if a majority of Honoluluans still want rail it’s because they still need to be “educated.”
America has two interlocking economic problems. The economy is slowing down, putting tens of thousands of people out of work. And the credit markets are constipated, with even lenders that have money hoarding it rather than lending it.
The second problem is harder for the average person to understand than the first problem for the simple reason that the people who work in the second part of the economy don’t let people in the first part of the economy play by the same rules. You can’t borrow money for routine operations, only for major capital expenditures like a house or a car. Businesses can and do and this is how they run. In slow times, a business borrows to expand, or renovate, or keep running through a slack period without laying anybody off.
Lenders are slower to lend when they’re afraid a recession will interfere with the borrower’s ability to repay, or if they think they might need the money themselves (banks are required by law to maintain a certain percentage of assets in readily accessible cash) and it seems churlish to criticize this when it was the lack of this caution on the part of subprime lenders that started this crisis in the first place.
One of the slams on a bailout plan to funnels money to mortgage borrowers and middle-class taxpayers — the little guys — is that there is no guarantee they will spend the money and prevent recession. But neither is there any guarantee that Wall Street firms will properly respond to the financial aid they get. You can argue that Wall Streeters are professionals and more likely to behave intelligently, but it was dumb action by these same people that caused the collapse of the mortgage-based securities market, so one of the few things we know for sure about them is that they emphatically do not always behave intelligently.
Well, if it were a simple problem perhaps it would have been fixed by now.
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