Mistake to Trust Wall Street Insiders to Clean Up Mess

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Dean Baker
Houston Chronicle, October 8, 2008
Peoria Journal Star (IL)
, October 25, 2008

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The enablers on Capitol Hill and in the Bush administration have given $700 billion to Wall Street to continue its business as usual. Former Goldman Sachs CEO Henry Paulson hired former Goldman Sachs executive Neel Kashkari to oversee the bailout. Kashkari's job will be to deliberately overpay the banks for their junk assets so that they will have enough money to stay in business and, ideally, to begin operating on a normal basis.

This isn't the first time that Paulson has turned to his former firm in a crunch. According to The New York Times, Lloyd Blankfein, the current CEO of Goldman Sachs, was in the room when Paulson decided to save AIG, the giant insurer, from bankruptcy. This is noteworthy because AIG owed Goldman $20 billion.

Just about every economist in the country condemned the Paulson approach to bailing out the banks. The most efficient and effective way to rescue the banks is to directly inject capital into the banking system, taking an equity stake, as was done last week in Iceland, and fifteen years ago in Sweden. On Wednesday, Great Britain went down the same path in dealing with its banking crisis.

With the direct equity approach, the banks have to temporarily surrender some ownership, at least until their books can be set in order and the government can resell them to the private sector. The top executives might also have to accept serious cuts in pay, if they keep their jobs at all. But the point of the rescue is to return the banks to normal operations, not to keep the banks' executives and stockholders happy at taxpayer expense.

The Paulson plan, by contrast, is designed precisely to make the bank executives and shareholders happy. Rather than having to write down large losses on their bad investments, Kashkari will have the taxpayers pick up much of the tab. The bank executives will still be pocketing tens of millions in compensation each year and the stockholders can count on considerably more money for their shares than if we just let market forces run their course.

Wall Street seems to have won this round, getting Congress and the administration to put its priorities above the national interest in structuring the bailout. However, we will soon be voting on new occupants for the White House and Congress. The voters may want to put a simple item at the top of their list of demands: No more government by and for Wall Street.

The presidential candidates should commit themselves to excluding Wall Street people from top positions in their administrations. We do not need yet another Treasury secretary from Goldman Sachs. These top positions should go to people who are familiar with the real economy, not Wall Street's financial machinations.

The argument for putting Kashkari in charge of the bailout was that he understood the way that Wall Street does business. But it is not clear that this is a skill we really need. The whole point is that we want to change the way that Wall Street does business. When the Soviet Union collapsed in 1991, no one looked to find experts in Soviet-style central planning to oversee the country's conversion to a market economy.

In the same vein, while it will be necessary to have officials in the next administration who have a solid understanding of banking and finance, it is not necessary to get another Wall Street insider. The best path forward for the country would be moving away from Wall Street's business practices as quickly as possible.


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. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.