David
Cay Johnston, who won a Pulitzer Prize for his innovative coverage of our tax
system, retired this year as a investigative reporter for The New York
Times. He is the author of Free Lunch: How The Wealthiest Americans Enrich Themselves at
Government Expenses (and Stick You with the Bill).
Whether you
favor the $700 billion bailout or not, the House vote today should make you
cheer--loudly.
Why?
Because the
majority vote against it shows that Washington
is not entirely in the service of the political donor class, by which I mean
Wall Street and the corporations who rely on it for their financing. These
campaign donors, a narrow slice of America, have lobbied and donated
their way into a system that stacks the economic rules in their favor. But faced
with as many as 200 telephone calls against the bailout for every one in favor,
a lot of House members decided
to listen to their constituents today instead of their campaign donors.
The GOP members
voted overwhelmingly against the bill, while two-thirds of the Democrats
favored it. Right now you can be sure
that cajoling and arm twisting is underway in an effort to persuade 16 GOP
members (or perhaps a dozen Republicans and a few Democrats) to vote the public
largesse for Wall Street.
None of this is
to say that we need, or do not need, some government intervention in the
markets. Rather it is to say that the administration has failed to make its
case, instead assuming that just as with the war in Iraq and the Patriot Act, it could
stampede Congress into thoughtless action and terrify the public into going
along.
Also, do not get
stampeded by the awful, ill-informed, and heavily one-sided coverage on cable
TV, which I have been monitoring.
Several friends have emailed me in a panic asking if they should sell
their holdings. Politicians and cable news deserve a lot of blame for fostering
fear.
The Dow Jones
Industrial Average, a measure of just 30 companies out of millions, closed down
just under seven percent. Back in 1987 the Dow fell 22 points in a single day,
and it was not the end of Western Civilization or even investing.
The stock
markets may fall more. They also may rise. After all, Goldman Sachs shares were
in a free fall just before the Bush administration declared a crisis, and even
with today's 12.5 per cent drop, they are trading at more than $30 per share
higher than at the low point eleven days ago.
Questions
abound: Do we believe in markets, which can be volatile--or only in managed
markets biased by government policy to the upside? Or do we believe in
corporate socialism?
Is our economy
so fragile that it cannot withstand shocks? Or is it fundamentally sound, as
Senator John McCain was declaring until just days ago? And if our economy
really is fragile, just how will borrowing $700 billion more to pay for bad
loans make things better for anyone but the lenders and some of their
customers?
What assurance
do we have that borrowing $700 billion will not make things worse? None.
Keep in mind a paper released
last week by two economists at the International Monetary Fund, who studied 42
banking crisis over the past 37 years. Their conclusions (not the IMF's) are:
bailouts often do not work, they often result in more bad practices, and they distort
economies by transferring wealth from taxpayers to bankers and their customers.
Congress held
hearings last week, but it only listened to the advocates of the bailout. We
deserve better. If Americans have to give up, on average, more than $2,300 of
our substance, then it's incumbent on the plan's advocates to make a
compelling, coherent case for sacrifice to the national good. But remember,
this money is being sought by an administration that told us not to sacrifice
after 9/11, but to go shopping.
It is also an
administration that, as I revealed in a story
in The New York Times in 2004, said that
the American taxpayer could not afford an extra $12 million to pursue Osama bin
Laden's financing of terrorist plots. And how tiny is this sum? Roughly the interest every three hours on
$700 billion. Ponder that--we cannot bear $12 million to get a murderous zealot
determined to strike again, but we can afford 58,000 times that much in a bid
to avoid the inevitable declines in asset prices that were artificially
inflated by the offerings of Goldman Sachs and other Wall Street firms?
Perhaps the
dissolution of this bailout bill means that we will now get a serious look at
just where the problem is, how pervasive or concentrated bank problems are, and
whether there are less expensive options, as suggested by economists like NYU's
Nouriel
Roubini, BU's Larry
Kotlikoff and Columbia's Perry Mehrling, and the Center for Economic Policy
and Research's Dean Baker.
Maybe
we will also get answers to some hard questions. Like:
--Why was the CEO of Goldman Sachs in the room when government
officials decided to bailout the insurer AIG, especially since Goldman has
about $20 billion, half of its shareholder equity, at risk on AIG? Keep in mind
that Treasury Secretary Paulson is the immediate former CEO of Goldman.
--Why was Lehman Brothers, a Goldman competitor, the only Wall
Street firm in trouble so far left to collapse on its own? The Wall Street Journal reports
today that it was the collapse of Lehman (which because of its structure may
not have been an attractive firm for purchase) that "triggered cash crunch
around the globe."
--Has Treasury obtained from every bank the amount of its illiquid
assets, which would tell us if the problems are concentrated at a few banks or
are pervasive?
--Would a temporary provision in the bankruptcy code, allowing
people with toxic mortgages to get their loans rewritten or pursued to
foreclosure, be a cheaper and better alternative?
Disclosure, transparency,
options--those should be the issues in the next few days.
--David Cay Johnston