Bailouts and meltdowns

Things went from bad to worse for the U.S. economy this week, as a federal bailout of the nation’s two largest mortgage-finance companies, Fannie Mae and Freddie Mac, was followed by the bankruptcy of another fiscal giant, the investment bank Lehman Brothers, then the sale of the brokerage firm Merrill Lynch, and, as of this writing, critical concern over the solvency of American International Group, one of the world’s largest insurers. The chaos and uncertainty were bad enough to produce the worse losses on Wall Street since the terrorist attacks of September 11, 2001, and no one seems to know where it might end.

Administration officials downplayed the severity of the crisis, with both the president and treasury secretary attributing the crisis to nothing more than “adjustments” in the credit market, as if the collapse of a half-dozen of the country’s most important financial institutions was nothing much to worry about. In reality, the frightening sequence of events was yet another example of the deep-seated problems of corporate mismanagement and government irresponsibility that repeatedly have devastated the U.S. economy in recent decades.

As with the savings-and-loan fiasco and the Enron scandal, the present crisis came about when a lack of government oversight allowed irresponsible executives to choose huge short-term profits—and the huge bonuses that went with them—over the long-term health of their businesses and the economy. As before, executives walk away with millions in bonuses and severance packages—as much as $24 million may yet be paid to the top two Fannie and Freddie execs—as taxpayers shell out billions to clean up the mess. And, once again, we find a government that is much too influenced by industry lobbyists and corporate campaign contributions to want to do anything about it other than pass the costs to the next generation of taxpayers.

In the present case, the driving force behind the downfall of Fannie, Freddie, Bear Stearns, Lehman Brothers and AIG has been the subprime-mortgage crisis. The corporations were part of a complex and poorly regulated process known as securitization that essentially made it possible for lenders to make high-risk loans. In the short term, the system was immensely profitable, as consumers borrowed record amounts and the housing market skyrocketed. But when the housing bubble popped, the result was another catastrophe for the companies and the economy.

Obviously, this kind of thing can’t continue. Our economy can’t afford more meltdowns and bailouts. It’s time to put in place economic policies that encourage a corporate culture focused on long-term growth and reasonable compensation for executives, not short-term bonuses and multimillion-dollar packages. There is no issue more critical in the upcoming presidential election, and specifics of the candidates’ economic-reform plans need to be front and center in the campaign.