The Guardian Unlimited, March 24, 2008
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Bail out America's hard-pressed homeowners and banks by all means. But the Wall Street geniuses who caused this mess should pay the price.
The Wall Street crew are shaking in their boots these days, as their own greed and stupidity threatens to destroy vast personal fortunes and banking behemoths that have been built up over generations. The financers who usually preach a crude brand of market fundamentalism are now running to the government and central banks begging for bailouts.
And, it looks like they might get what they want. There is a substantial contingent of progressives in Congress and political circles who usually fight for the interests of those at the middle and bottom at the expense of those on top. However, during this period of unprecedented financial crisis, most of these progressives appear to be on the sidelines. Rather than taking advantage of this extraordinary opportunity to reduce inequality and educate the public about how the economy really works, progressive voices have been unusually quiet.
While the basic story on the economic crisis should be well-known, it is nonetheless worth repeating. The Federal Reserve Board allowed the growth of an $8 trillion housing bubble ($110,000 of housing bubble wealth for every homeowner) in the years from 1996 to 2006. While this bubble was easily recognizable to competent economists, the entire political and financial establishments managed to ignore the housing bubble until it began to burst last year.
The collapse of the bubble is now pushing the economy into a recession. This is the result of both the direct effect of the collapse on the housing market and more importantly because of the indirect effect that the loss of trillions of dollars of housing wealth has on consumption. Homeowners are rapidly scaling back their consumption after losing much of their life's savings in the last year.
The collapse of the housing bubble has inflicted enormous pain on tens of millions of people, but it is also inflicting pain on Wall Street and the financial sector. The honchos in this sector include many of the richest people in the country. With the collapse of the housing bubble, we are finding out that they were far less financially sophisticated than any of us could have imagined. Many banks, brokerage houses, and investment funds took highly leveraged bets that assumed the housing bubble would not burst. Now that it has burst, some of the richest people in the country face the risk of a middle class lifestyle - unless the government comes to the rescue.
This is where things really get painful. Rather than taking this opportunity to tighten the screws, many progressives are standing by the sidelines or actually cheering on plans to bail out the ridiculously rich. The same people - who are on other days fight to raise the income tax rate on the rich, or for preserving the estate tax - are just watching as the Fed hands taxpayer dollars to Wall Street, and hoping that Congress will come up with tens of billions for buying the bankers' bad mortgage debt.
There is of course a cover story - there always is. We have to let the Fed bail out the banks or the financial system would collapse. This would hurt everyone, especially ordinary workers. And the mortgage bailout is supposed to help low and moderate income homeowners.
But the cover stories don't hold water. We can keep the banks running without bailing out the incredibly rich people who drove them to ruin. England showed us the way earlier this year with its takeover of Northern Rock, a major bank that got itself in trouble with bad mortgage debt.
We can also help homeowners without bailing out the banks. The rescue proposals currently on the table would have the government buy or guarantee mortgages on homes that are still hugely overpriced. These proposals could give hundreds of billions of dollars to the banks, while providing little help to homeowners. Most would still be paying far more on their mortgage, property taxes, and insurance than they would to rent a comparable home. Furthermore, the bailout conditions virtually guarantee that they will never have a dime in equity.
As an alternative to bailing out the banks, we can temporarily change the rules on foreclosure to give homeowners the right to rent at the fair market rate. This would provide them with security in their home. More importantly, it would likely create a situation where most homeowners stay in their house as owners, since banks would rather renegotiate mortgage terms than end up as landlords.
The Wall Street boys got themselves in a huge mess through their own greed and stupidity. Now is the time to make sure that they enjoy the fruits of their labor. These are the same people who don't think that they should have to pay higher taxes so that kids can get health care and child care. There is no reason that the rest of us should pay higher taxes so that they can keep their mansions in the Hamptons, their private jets, and retinue of personal services. Let's leave this one to the market.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.