Bailout or power grab?

I've been swimming 2-3 times per week, trying to get back in shape. I love exercising but it doesn't happen unless I have an easy to maintain routine and for the moment I've found it. Lunchtime lap swim at the community pool. It takes me about an hour to go, swim and come back and I love swimming, I grew up swimming. One of the other joys is listening to NPR there and on the way back, even though I plan to someday ride my bike (it's about two miles). I was thinking last week about what an exciting time we're living in. For better or worse, this is truly an exciting millennium so far. It's easy to get dismayed by the widening gap in ideology, lifestyle and economic status between Americans, but at the same time, these are the conditions from which great change can come.

Every day, driving to the pool, there's someone on the radio talking about the current economic situation. Every single person has a different piece of the puzzle. There is honest-to-god debate going on. The war in Iraq has been reduced, over the years, to a couple of soundbites and a position of either being for the war, okay with torture and willing to forgo civil liberties or being against the war, not okay with torture and unwilling to forgo civil liberties. But this current crisis is fresh and this time people and are not falling for the alarm bells and just handing over the keys to the store. This morning in the New York Times, there was a graphic of the Dow falling and a headline about yet another big bank consolidation. Then, this afternoon, the Dow falls even more and is blamed on the house not passing the bailout bill.

Now I understand that the banks want this to sound confusing so that we don't really understand what's happening. It's funny because I've been watching episodes of Hercule Poirot (from BBC) every day since landing at my mom's house and I now figure out the mysteries in the first few minutes. Let's look at the facts the way Poirot would:
1) The current disaster was predicted by many people over the last several years which means that the stage was being set for a certain disaster and we can only assume, either intentionally set or intentionally not averted.
2) Several big banks fail because of years of high-risk practices that have made many people in the industry very wealthy, leaving homeowners and taxpayers, high and dry.
3) The former CEO of one of the failed banks works with the Federal Reserve (a central bank created with precisely this kind of situation in mind) to devise a plan in which the federal government bails out these failed banks. They predict a massive collapse if that does not happen.
4) Nothing is done to help or protect homeowners that are losing their homes.
4) Republicans vote against the bill and the stock market crashes at precisely that moment.

There are a couple of things about this situation that are very suspicious. Hercule Poirot, a fictional character, could himself arrive from the 1930's and ask these questions:

First, if the current disaster was predicted, why was nothing done about it? The Republicans favor deregulation and do not support government run businesses. This explains why they are voting against the bail out bill and it explains why no regulations were put in place. Their policy is to allow business to operate in a free market which means if a business fails - and that includes banks - it is not the government's job to bail them out. Poirot might speculate that nothing was done to allow certain people to get very rich. In his world, almost all crime is motivated by money.

Second, the fact that it is big banks failing – banks that indulged in risky practices – instead of an overall economic collapse seems to indicate that in fact the economy is not failing, it is just these banks that are failing. But what has their demise produced? A massive consolidation of banks, increasing their financial power. The bail out plan would further empower these banks by wiping out their bad debt and giving them a superior advantage over all the other banks that acted responsibly. And who devised this plan? The former CEO of one of these failed banks. Poirot would definitely be interviewing Henry Paulson right now.

Third, the government already bailed out several institutions, promising each time that it would stop the bleeding, but it didn't. So what are the chances that Wall Street would hang on, even performing well last week and wait until this day to crash, perfectly coinciding with the rejection of the bill? It would be easy to wonder if perhaps there are people who can pull strings to make things happen, kind of like how the gas prices rise and fall to perfectly coincide with certain political movements in this country. And if that is the case, then who is to say that this entire event isn't the product of certain strings being pulled so that it will happen this way? We all know that Bush's Iraq invasion was planned and on the table shortly after he took office. He only needed an inciting incident to put the plan in place. Couldn't it be argued that this collapse is merely an inciting incident to allow a massive consolidation of power by the banking industry?

Someone commented on the article about the Citigroup acquisition that bigger, fewer banks would be easier to regulate. Is that why it was so easy to regulate them to avoid this disaster? Let me repeat a story of how I was robbed by Bank of America. Although only $1,300, it perfectly illustrates how powerless the "little man" becomes against a big bank. In a nutshell, the money was taken from my account and BofA claimed no responsibility for it, nor did they show any interest in figuring out how it was stolen. I relentlessly campaigned to get it back and eventually did, immediately moving my account to a small credit union. In the end, it really isn't about regulation, it's about power. These banks are already incredibly powerful and have more power over our money than we do. A friend of mine wrote a very interesting blog post looking at the situation not from an economic standpoint but for what it is really is, a power grab. What do you think?

The sky is falling!

About a year ago, when I was taking the bus down to San Jose every morning for my job, I subscribed to The Economist to have regular reading materials. I let my 6-month subscription lapse after noticing that every issue was filled with doom and gloom. At one point, though, I was going to blog about how little economists actually know and understand about how "the economy" works. I put it in quotes because what is it really? It's like the human body in that it's more complicated than anyone even realizes. We develop drugs to treat disease but because drugs only address symptoms, they have multitudes of side effects, some so severe that it's sometimes advisable not to even take the drug. Very little in medicine is holistic in that it addresses the health of the entire ecosystem (the body). This is how I see the economy being treated right now, like it has cancer and we're just going to give it a massive dose of chemo even though chemo has drastic side effects and, depending on the health of the subject, sometimes only makes things worse.

I had saved an in-depth interview with Ben Bernanke about the levers he was pulling a year ago. There must have been over 20 quotes that basically said that no one really knows how the whole thing works. He just either turns up or turns down the volume on various dials and sees what happens. The problem, he admitted, with that approach is that it takes time to see the results so every adjustment is followed by a period of growth or decline before another adjustment can be made. Even then, it's not reliable to assume that if raising interest rates was bad then lowering them must be good because everything affects something else. In every interview on NPR lately, I keep hearing that the system is far more complex than it used to be and "we're just discovering that now." The truth, I believe, is no one knows how it works. I wish I understood it just a little, because I feel like this whole thing is being grossly mishandled.

It eerily looks like the 9/11 scenario to me. In both instances, there were many warnings that a disaster was coming and nothing was done to prevent it from happening. I've been reading articles for a couple of years now about an impending housing crisis. These people making the loans knew there was a chance that the whole thing would blow up. They knew, but they didn't care. Why should they? There were huge profits to be made and like the Enron fiasco, some people still made out like bandits while the entire company lost their jobs and savings plans. Secondly, after the disaster, instead of investigating how it happened and figuring out how to prevent it from happening again, our leadership asked to have total control without any restrictions. This is no time for asking questions, they said! Instead, they invaded two countries, locked up hundreds of people without rights, restricted our civil liberties, skirted accountability and spent billions of dollars (not on our economy and infrastructure) and seven years later, we're still fighting the "war on terror" with no end in sight. How do we know this "bailout" won't be more of the same? I can't help wonder if this constant comparison to the Great Depression isn't just a way of scaring us into making a bad decision.

I heard the plan described as basically a way for these financial institutions to unload bad debt without any scrutiny and without having to make any promises in return about how they'll conduct business in the future. These are the same companies that have previously been treated with a "hands off" approach because the government shouldn't interfere, right? This is what we always hear about how the "free market" works and how it rights itself when unrestricted. Kind of like the explanation that when left to the market, the global warming crisis will just magically right itself without any interference from the government. So why does that approach suddenly get turned on its head when these companies, unfettered, behave badly and put everyone in a bad spot? Now they expect the government to bail them out? Bush says to just fork up the cash and not give any lectures. He threatens congress with being responsible for a total collapse of the economy if they don't ask fast enough, if they stop to ask questions or make demands, for instance. And yet no one's asking the question that should be asked which is why it's so difficult to afford a house in the first place.

There has been some speculation that Wall Street should just take the hit. People say that this could go on for much longer than we think. Bailout after bailout after bailout. Has anyone actually done an analysis on the long-term effects of this approach? Certainly, a parent could tell you that bad behavior that goes unpunished, and in fact rewarded, only encourages more bad behavior. Wasn't this the argument when last year, the government made it more difficult for individuals to file for bankruptcy? Why should it be easier for financial institutions to be bailed out while the executives make out with salaries of $10 million and more? Oh no, though, they say this is all for the taxpayer. It's to protect us from total disaster. But don't ask how it works.