Wheels coming off

/ 22 September 2008

Andrew pointed to this clear and readable parsing of the financial crisis today. Jim Manzi writes about the situation leading up to last week and the choices before us this week. “The problem we face is often described as mind-bendingly complex, but in its essentials, it is simple.”

The end state that we want to get to is pretty clear.

The price of the average home in America has fallen a lot, and is likely to fall further (although there will be huge regional differences). Some very over-leveraged homeowners are going to declare bankruptcy. Others are going to sell the boat and eat out less in order to avoid this. We need prices to mark to market (which they will eventually do anyway), as rapidly as possible consistent with not causing a depression caused by a collapse of consumer activity.

Many financial institutions have both profitable commercial businesses, and financial instruments that are wildly unprofitable, housed under one roof. We want the executives of these companies to lose their jobs, and the shareholders and bondholders in them to lose their money, while preserving the productive parts of the businesses and preventing a depression caused by a collapse of credit.

I can buy this desired end state. I’d put special stress on that “lose their jobs” and “lose their money” bit about executives and shareholders.

But I’m afraid that what we are actually planning is a way for these folks not to lose their shirts (and pants and socks and shoes). We have watched compensation for certain work spiral out the stratosphere this past decade. This broadening gap between rich and reasonable is clearly, in retrospect, an indicator of theft. The rich, with few exceptions, stole the future from the middle class and poor.

Are we going to make sure they get away with it? It sure feels like we are. Luckily there are some voices of conscience and sanity among our leaders. Check out the recent press release by Bernie Sanders (thanks, Daily Kos):

The people who can best afford to pay and the people who have benefited most from Bush’s economic policies are the people who should provide the funds for the bailout. It would be immoral to ask the middle class, the people whose standard of living has declined under Bush, to pay for this bailout while the rich, once again, avoid their responsibilities. Further, if the government is going to save companies from bankruptcy, the taxpayers of this country should be rewarded for assuming the risk by sharing in the gains that result from this government bailout.

Specifically, to pay for the bailout, which is estimated to cost up to $1 trillion, the government should:

a) Impose a five-year, 10 percent surtax on income over $1 million a year for couples and over $500,000 for single taxpayers. That would raise more than $300 billion in revenue;

b) Ensure that assets purchased from banks are realistically discounted so companies are not rewarded for their risky behavior and taxpayers can recover the amount they paid for them; and

c) Require that taxpayers receive equity stakes in the bailed-out companies so that the assumption of risk is rewarded when companies’ stock goes up.

I love these ideas, but note that there may be many fewer of the wealthy he proposes to tax given this crisis, so we should probably be looking for ways to return some of their haul to federal coffers (some way to tax savings or equity of the super-rich?). Sanders also suggests an employment program, re-regulation, and the breakup of companies that are “too big to fail.”


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