Paul Krugman; Where are the grown-ups in this financial crisis?
Post-Bulletin, Rochester MN
Many people on both the right and the left are outraged at the idea of using taxpayer money to bail out America’s financial system. They’re right to be outraged, but doing nothing isn’t a serious option. Right now, players throughout the system are refusing to lend and hoarding cash — and this collapse of credit reminds many economists of the run on the banks that brought on the Great Depression.
It’s true that we don’t know for sure that the parallel is a fair one. Maybe we can let Wall Street implode, and Main Street would escape largely unscathed. But that’s not a chance we want to take.
So the grown-up thing is to do something to rescue the financial system. The big question is, are there any grown-ups around — and will they be able to take charge?
Earlier this week, Henry Paulson, the Treasury secretary, tried to convince Congress that he was the grown-up in the room, come to protect us from danger. And he demanded total authority over the rescue: $700 billion to be used at his discretion, with immunity for future review.
Congress balked. No government official should be entrusted with that kind of monarchical privilege, least of all an official belonging to the administration that misled America into war. Furthermore, Paulson’s track record is anything but reassuring: he was way behind the curve in appreciating the depth of the nation’s financial woes, and it’s partly his fault that we’ve reached the current moment of meltdown.
Besides, Paulson never offered a convincing explanation of how his plan was supposed to work — and the judgment of many economists was, in fact, that it wouldn’t work unless it amounted to a huge welfare program for the financial industry.
But if Paulson isn’t the grown-up we need, are congressional leaders ready and able to fill the role?
Well, the bipartisan "agreement on principles" released on Thursday looks a lot better than the original Paulson plan. In fact, it puts Paulson himself under much-needed adult supervision, calling for an oversight board "with cease and desist authority." It also limits Paulson’s allowance: he only (only!) gets to use $250 billion right away.
Meanwhile, the agreement calls for limits on executive pay at firms that get federal money. Most important, it "requires that any transaction include equity sharing."
Why is that so important? The fundamental problem with our financial system is that the fallout from the housing bust has left financial institutions with too little capital. When he finally deigned to offer an explanation of his plan, Paulson argued that he could solve this problem through "price discovery" — that once taxpayer funds had created a market for mortgage-related toxic waste, everyone would realize that the toxic waste is actually worth much more than it currently sells for, solving the capital problem. Never say never, I guess — but you don’t want to bet $700 billion on wishful thinking.
The odds are, instead, that the U.S. government will end up having to do what governments always do in financial crises: use taxpayers’ money to pump capital into the financial system. Under the original Paulson plan, the Treasury would probably have done this by buying toxic waste for much more than it was worth — and gotten nothing in return. What taxpayers should get is what people who provide capital are entitled to: a share in ownership. And that’s what the equity sharing is about.
The congressional plan, then, looks a lot better — a lot more adult — than the Paulson plan did. That said, it’s very short on detail, and the details are crucial. What prices will taxpayers pay to take over some of that toxic waste? How much equity will they get in return? Those numbers will make all the difference.
And in any case, it’s not yet clear whether we have a deal.
This has to be a bipartisan plan, and not just at the leadership level. Democrats won’t pass the plan without votes from rank-and-file Republicans — and as of Thursday night, those rank-and-file Republicans were reportedly balking.
Furthermore, one non-rank-and-file Republican, Sen. John McCain, is apparently playing spoiler. Earlier this week, while refusing to say whether he supported the Paulson plan, he claimed not to have had a chance to read it; the plan is all of three pages long. And during Thursday’s meeting at the White House, reported Marc Ambinder of the Atlantic, McCain brought up proposals that had already been rejected by congressional leaders of both parties and declared unworkable by Paulson.
The bottom line, then, is that there do seem to be some adults in Congress, ready to do something to help us get through this crisis. But the adults are not yet in charge.