Who Will Bail out the Taxpayer?

Who Will Bail Out the Taxpayer?

The American financial system has lurched from crisis to crisis all summer, resulting in government interventions whose shock value has increased from a stinging slap in the face to a full body blow in the latest proposal to bail out $700 billion in “toxic” assets held by a wide range of domestic and foreign financial institutions.

First the Bush Administration found it necessary to save Bear Stearns from bankruptcy. Then Secretary Paulson and Fed Chair Ben Bernanke engineered a national take-over of Fannie Mae and Freddie Mac. That was still not enough.

A short time later the Federal Reserve announced that it would take a nearly 80 percent interest in the insurer American International Group in exchange for a two-year, $85 billion loan.

Why did the U.S. government have to bail out an insurance company? Well, it turned out that AIG had engaged in a new unregulated financial instrument, selling so-called “credit default swaps” which are essentially insurance on debt.

And when firms borrowed money to finance debt that included subprime mortgages and other “toxic” assets, the unregulated free-for-all that has been the U.S. financial markets for the past four years finally threatened to implode, .

Only in the case of Lehman Brothers did market capitalism actually play out in full leading to the bankruptcy of that institution.

The rules of capitalism are supposed to be simple. As Don Boudreaux, a professor at George Mason University puts it: “[Y]ou are free to take whatever risks you want as long as you are willing to bear the costs for those risks. And you get the upside of it too. If you have huge gains, great, you get the gains. But no one helps bail you out or subsidize you,” (“Do Federal Moves Take up Back to the New Deal?" All Things Considered, September 18, 2008). http://www.npr.org/templates/story/story.php?storyId=9477132

That's no longer true in this new world-turned-upside-down view of American capitalism where government intervention is now the name of the game and where it seems that if you win, you win, but if you're about to lose, you ask someone else to pay your bill.

So this week Secretary Paulson and Fed Chair Ben Bernanke are back on Capitol Hill, hats in hand, begging for a sum that makes these other billion-dollar interventions bail in comparison, and with even less oversight and less accountability to the real people who will be paying the bill – you and me, the American taxpayers.

Fortunately, despite the real crisis at hand, legislators of both parties have finally found the backbone to stand up to the Bush Administration and say, “Hey, wait a minute!”

In blunt and often angry utterances, these representatives are insisting that the details of this proposed gargantuan bail-out get fleshed out, that there is oversight of how the Fed and Treasury will implement the plan, and that the taxpayers get something back if this bad debt proves to have any ultimate value.

Congress is finally reflecting the outrage of an American electorate that has been sold an expensive and unnecessary war in Iraq and now is being asked to fund a similarly expensive financial rescue plan with just about as much planning and oversight as the Bush Administration put into its invasion of Baghdad, i.e. Let's just start a war and worry about the details later.

It's not just that Paulson and Bernanke have cried “wolf” once too often this summer and never actually saved a single lamb from slaughter, but they also have to take responsibility for the disastrous policies and regulatory performance of an administration that will go down in history as one of the most spendthrift, deceptive, and incompetent in American history.

To add insult to injury, the proposed Paulson-Bernanke plan contains no financial relief for the individual taxpayers who are being asked to bail out Wall Street while receiving no assistance with the housing crisis, or with shrinking incomes, or a growing unemployment rate.

As many housing advocates and economists will tell you, the financial industry has done a dismal job so far helping homeowners facing foreclosure restructure their debt. At the very least, any bailout of the financial industry must include some provision for individual taxpayers to restructure their debts, particularly for those who are in danger of losing their homes.

If Congress does agree to some form of the Paulson-Bernanke plan, it should be with some very serious strings attached. Any institution agreeing to participate should be required to disclose all of its debts, to fire its top management without any gold parachutes attached, and to agree to profit-sharing with the Treasury should its “toxic” assets ultimately turn out to have some value.

Then Congress needs to repeal its ill-judged revisions of the personal bankruptcy laws to make it easier for homeowners facing foreclosure to refinance their debts and not worsen a deteriorating housing market.

And finally, it's time for the American public and its leaders to decide whether we really are a capitalist society or not. If we offer corporations a safety net, we need to make sure that we not only have the appropriate regulations on the books, but regulators who enforce those laws thoroughly and seriously so that Wall Street doesn't once again have the opportunity to go to Vegas on the taxpayers' dime.

It seems almost certain that in resolving the current financial crisis, the American taxpayer will get stuck paying the check, but as voters we can also press our representatives hard to reduce the size of the final bill.

P.S. For an excellent overview of the financial crisis, see Gretchen Morgenson's September 21st New York Times column, entitled "Your Money at Work, Fixing Others' Mistakes."