The Big Bailout

Sep 19th, 2008 | By | Category: Economics, Featured Articles, Lead Article

Well, ladies and gentlemen, the big socialization of risk that I’ve–and many others–have been foreseeing has occurred:

The actions began to get under way on Thursday with discussions between the Treasury, Federal Reserve and Congressional leaders on what could become the biggest bailout in United States history, a plan likely to authorize the government to buy distressed mortgages at deep discounts from banks and other institutions….

In a move against traders who have sought to profit from the financial crisis by betting against bank shares, the Securities and Exchange Commission issued a temporary ban on short sales of 799 financial stocks, following similar action in Britain on Thursday.

And the Treasury, moving to restore confidence in another financial bedrock, said that it would guarantee, at least temporarily, money market funds up to an amount of $50 billion to ensure their solvency, a startling intervention into what had been considered among the safest investments.

For years, I’ve had to put up with conservatives bitching about the moral hazard posed by FDR’s New Deal. Today’s actions reveal these “free market” proponents as gigantic, hypocritical assholes.

Don’t be too shocked.

Want to distill down the New Deal-era financial reforms? If you want our money to bail you out, you have to play honestly and by our rules. If something is important enough to the economy that we’d consider bailing it out, it deserves regulation first, bailouts second.

For example, the Glass-Steagall Acts prevented risky investments from shacking up with the safe–keeping investment banks and commercial banks separate. The same laws created the FDIC insurance of our savings account also limited where and how aggressively insured banks could invest.

Most of Glass-Steagall’s regulatory provisions were written out of law in 1999, setting the stage for our present catastrophe. Today’s “solution” to the present crisis is all bailout, no regulation–the mirror image of FDR’s. It’s going to fail.

“Free market” conservatives–like our current SEC chairman Christopher Cox–for years have been telling us the market will collapse irresponsible companies, relieving the government of the responsibility to actual bother regulating the financial industries. Well, when the irresponsible have started collapsing, Cox and others are right there with our wallet, dumping cash on the table to “restore confidence.” I have an ugly truth for you: confidence shouldn’t be restored in this system.

Want to restore confidence? I have a suggested governmental takeover for you: The entire debt rating industry. If the goal is to calm down global investors, who were burned by “high rated” debt that was anything but good, a public execution of Moody’s and others would be the perfect way to do it.

Take the money we’re now showering on the greatest failures in two generations to pay for a new governmental debt-rating agency. Pay the employees of this agenccy usurious wages–wages beyond any bribe. Grant these employees the right to tear into the books and documentation behind all of the financial derivatives, and give honest ratings to the relative quality of the debt.

With that, I know my confidence would be restored–in more than just the financial system.