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WORD COUNT
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NOVEMBER 19, 2008
FINANCIAL
CRISIS DUE TO ‘CRONY CAPITALISM’ – by Mark Weisbrot
By now, it
is now clear that congressional approval of President George W. Bush's
$700 bailout package has done nothing to ease the current financial
crisis. Credit markets worsened for several days after the bill passed
Congress. The stock market also plummeted to nearly 10-year-lows.
So much
for dire warnings from the administration that Congress was risking a
Great Depression if it did not quickly fork over the dough. Bailout
supporters said Congress had to do something to unfreeze the credit
markets. But it didn't work.
Unfortunately, there is widespread misunderstanding of the current
financial crisis and economic recession. Most people think that the
economic downturn – which will be officially designated a recession some
time in the near future – is the result of the financial crisis. But
this is not true. The current recession is mainly the result of a
collapsing housing bubble. This bubble of more than $8 trillion dollars
accumulated between 1996 and 2006, and it is only about 60 percent
deflated so far. This means that even if all the problems in the
financial system were solved miraculously tomorrow, the United States
would still be facing a serious recession.
Of course,
the financial crisis can make this worse, as financial institutions cut
back on lending, and short-term interest rates for commercial borrowing
rise. We are indeed facing a serious emergency. But the bailout package
is a wasteful and inefficient way of dealing with the problem of banks
holding bad debt, mostly related to mortgages gone sour in the housing
bust. It enables the U.S. Treasury Department to buy up "troubled
assets" – mostly mortgage-related securities – from financial
institutions, at prices that will likely be much higher than they are
worth.
Economists
across the political spectrum saw this as a wasteful and inefficient way
to fill holes in banks' balance sheets. Ordinary citizens and taxpayers
saw the bailout as an enormous rip-off, and flooded Congress with phone
calls, defeating the bailout on its first vote.
Indeed,
the most important ways that our government is currently holding the
financial crisis in check do not involve overpaying banks for bad
assets. The Federal Reserve and U.S. Treasury have intervened repeatedly
to pour liquidity into the banking system. They have agreed on federal
insurance for $3.4 trillion of money-market mutual funds held by
millions of Americans. The Fed has also created a new facility to buy
commercial paper, the short-term debt issued by banks and corporations,
where lending has been shrinking. The Federal takeover of Fannie Mae and
Freddie Mac, and the nation's largest insurer AIG, were also necessary
to preserve the stability of the financial system.
But all
this is just the beginning of cleaning up the mess that has resulted
from a de-regulated and un-regulated financial system gone wild. The
government will have to take over more insolvent financial institutions
and provide capital to others. It will have to take steps to help
homeowners, to minimize foreclosures and evictions. And it will need to
provide the largest fiscal stimulus package since the Great Depression
to prevent this recession from dragging on for years. The worst part
about the bailout is that some politicians will say we can't afford the
necessary stimulus because we just added $700 billion to the national
debt.
Americans
will now have to fight for measures that protect the public interest,
not the interests of those who made this mess. Treasury Secretary Henry
Paulson made $163 million as CEO of Goldman Sachs in 2006. Now he and
his former colleagues at Goldman are running the Wall Street bailout.
During the
Asian financial crisis 10 years ago, there was an expression for this
kind of system: "crony capitalism."
--
Mark
Weisbrot is co-director of the Center for Economic and Policy Research
in Washington, D.C.
www.cepr.net. A photo of Mark Weedsport is available
CLICK HERE
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