Curing a broken financial system

Chuck McIntyre is a Sacramento economist and writer.

The past several weeks of financial crisis have been scary, indeed. After several fits and starts, Congress passed the Emergency Economic Stabilization Act of 2008—a.k.a. “bailout”—that allows the U.S. Treasury to buy securities (of indeterminate value) from failing financial firms, includes a vague charge to prevent more home foreclosures, may limit “golden parachutes” for executives from the failing firms that seek help and provides for the government to recoup “losses” after five years, all under the oversight of two boards.

The bailout is a seemingly inadequate response to the crisis from the standpoint of most taxpayers and economists, but better than the administration’s first opaque and vague proposal by Henry Paulson—labeled “cash for trash” by Princeton economist Paul Krugman. Yet the stock market continues its erratic decline and, more importantly, credit markets have nearly shut down, with banks afraid to lend even to other banks, never mind to businesses and individuals.

The origin of the crisis may suggest its “resolve.” Besides Wall Street brokers like Paulson, major perps are Former Sen. Phil Gramm and former President Bill Clinton. Gramm led efforts to pass banking deregulation laws, including the landmark Gramm-Leach-Bliley Act in 1999, signed by Clinton, which removed Depression-era laws separating banking, insurance and brokerage activities. This policy stimulated development of the unmonitored derivatives market where bad loans were bundled with bogus ratings and sold to investors, helping to produce the housing bubble.

But what about “losses” for ordinary working Americans who are experiencing a decline in the value of their homes, equities, 401(k)s, IRAs and other pensions and retirement hopes? On top of that, citizens now must worry for their jobs, wages and future opportunities. A little context:

Sadly, average income for the American family has declined since 2000, more so among skilled workers than among unskilled. Currently, the top 1 percent of wage earners hold 23 percent of the income, the highest inequality since 1928 and exacerbated by the Bush tax. During the past quarter-century, CEO salaries have increased by five times, while U.S. workers’ wages have declined. Years of “trickle-down economics” obviously haven’t worked.

Ironically, despite wage losses, the American workers’ productivity is the highest in the world—according to the International Labor Organization—some 14 percent higher than the second-best Ireland.

A possible resolve to our crisis is described by Joe Stiglitz, Columbia University economist, who proposes better regulating the toxic financial products (derivatives, credit swaps, etc.) that nobody understands, injecting equity into banks holding lousy mortgages in a transparent fashion, easing the continuing fall of the housing market, and restoring trust between lenders and borrowers and between the public and our government. Add to this prescription holding debtors (American workers) temporarily harmless and investing in the country’s infrastructure and alternative energy—new life for the real economy.

As Mohandas Gandhi said, “Earth provides enough to satisfy every man’s need, but not every man’s greed.”