Bailout must be combined with structural reform

September 30, 2008

After the rejection of the Paulson bailout plan by the US House of Representatives the markets reacted in panic, with the Dow Jones setting a record for a one-day loss in points of 778. Doug Henwood believes that if government does not reach an agreement to bailout the banking institutions, the threat of disaster for the real economy could become a reality. However, a bailout on its own is not enough to fix a broken system and the government has a necessary role to play in any substantial change.

After the rejection of the Paulson bailout plan by the US House of Representatives the markets reacted in panic, with the Dow Jones setting a record for a one-day loss in points of 778. Doug Henwood believes that if government does not reach an agreement to bailout the banking institutions, the threat of disaster for the real economy could become a reality. However, a bailout on its own is not enough to fix a broken system and the government has a necessary role to play in any substantial change.



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Story Transcript

PAUL JAY, SENIOR EDITOR: The US House of Representatives met on Monday to vote on the proposed $700 billion bailout plan. By midday, the House had rejected the proposal by a vote of 228 to 205. The rejection was a bipartisan affair, with 133 Republicans and 95 Democrats voting against the plan. Joining us now from New York City to give his analysis of the day’s events is Doug Henwood, founder and editor of The Left Business Review—I’m sorry, Left Business Observer, Doug. Doug, how are you? Thank you for joining us.

DOUG HENWOOD, LEFT BUSINESS OBSERVER: My pleasure.

JAY: As the Chinese say, we live in interesting times, or as Karl Marx said, if you want to understand the mentality of a capitalist, it’s après moi le deluge—after me comes the floods, and I’ll make as much money as I can before they get here. So what are we seeing? And are we heading into a financial apocalypse, as some people have been warning us?

HENWOOD: I think the risk of that is quite high. The credit system is frozen up, banks are afraid to lend to each other, and so far the impact on the real economy of this freeze-up has been minimal, modest, but I think it’s going to get worse. If we start seeing a freeze-up of regular lending activities, then we’re going to be in a deep recession pretty soon. So this is a scary thing, and, well, other countries that have gone through these kinds of financial crises have gotten out of them by mounting big bailouts. The US, which has mounted many a bailout over the last few decades, has now decided to try to do this one without it, although I suspect we’re going to see a re-vote in the coming days. But if this rejection survives, these could be perilous times ahead.

JAY: Well, the Heritage Foundation, which are the big free-market advocates, supported this bill. So there’s a lot of conservative forces that are behind it. Certainly most of the Democrats are behind it. But those people that are against it seem to break into to two camps. You have the Democrats against it because there’s not strong enough, it seems, public ownership, public equity in this bailout. On the Republican side, they raised constitutional issues, that Paulson will have too much power. But what’s really going on here? Are they just afraid that these are people that are afraid of their constituents when they go home and try to get reelected?

HENWOOD: Yeah, well, that could be it. I mean, I can’t say that the public understands these issues very well. If you look at any number of polls, they come up with completely contradictory numbers. You get strong opposition, strong support. It all depends upon how the thing is worded. So that suggests that people don’t really have a deep understanding of what this is all about.

JAY: And I would suggest not only them. I mean, you hear the actual players doing the negotiations, and they seem as confused as anybody about what’s really going on.

HENWOOD: Well, that’s true. Nobody really knows what’s happening. I’ve actually worked up a little sympathy for Bernanke and Paulson over the last few weeks, because everything’s blowing up around them and they don’t really know what to do. This is very scary stuff. But, you know, one big name after another falling down, and who knows who’s next?

JAY: Yeah. Citigroup just took over Wachovia’s banking interests, so we have another major bank—.

HENWOOD: Citibank was thought to be at death’s door recently too, but I guess they’re, you know, in the land of the blind, one-eyed-man king.

JAY: And these deals seem to be negotiated late into the hours of the night. The Feds are brokering these shotgun marriages to keep the banking system going.

HENWOOD: Yeah. It’s all happening over weekends too. It seems like things happen on Sunday nights now, ’cause they want to have it all done before the markets open on Monday morning. But the markets opened this Monday morning nervous that the bailout bill was in trouble, and then, when it failed, they really took a dive.

JAY: So let’s talk about the underlying reasons for the crisis. What do you think is the real story why this crisis is happening? And what should be done about it?

HENWOOD: Well, there are several answers to that question. One is, of course, the housing bubble and bust and all the mortgage securities that finance the bubble now have gone sour, alright, so that’s part of it. There’s also the longer-standing story of increasing financial speculation, increasing adventures in leverage that have come about over the last 25, 30 years, and that plus the increasing polarization of incomes in the United States. Just the growing gap between rich and poor meant that the non-rich have been borrowing to maintain a standard of living that their labor incomes couldn’t support, and the very rich have been only too happy to lend them some of their spare cash. So that is also an underlying problem with this. It’s just really—fundamental structure of the economy is really—this is, you know, what we used to say, ripening of the internal contradictions.

JAY: It’s actually interesting to hear "ripening of the internal contradictions," because we’re hearing that kind of language out of some of the leading capitalists in the United States right now, talk of socialism and state socialism, and they’re talking about Wall Street socialism, the kind of words one doesn’t usually hear in American or other discourse these days. What should people be demanding? If there needs to be some kind of radical measure within today’s political context, what should be done? What’s possible?

HENWOOD: Well, I think some sort of large bailout is inevitable and necessary. And that doesn’t mean it’s going to happen, but it should happen. But, you know, the public should get something in return for its consideration, and at the very minimum that would mean a re-regulation of the financial system and the financing of any bailout with taxes on rich people and the financial sector eventually. Maybe the financial sector can’t pay right now, but they will be able to pay some day, so we can certainly arrange that at some point in the future. But we can also talk about creating new kinds of institutions. You can have a very tightly regulated financial system that’s treated as if it were almost a public utility. You could have the creation of non-profit or publicly owned or all kinds of experimental financial institutions that would provide basic financial services for people at low cost, that would finance local community development, provide funds for neighborhoods and areas that are denied funds and in distress. So I’m only at the stage where I can come up with some vague and evocative ideas along those lines.

JAY: One of the critical issues which you raised earlier was the extent to which the American economy’s been driven by consumer debt, people trying to live at sort of historically established standards of living that wages just won’t support anymore. And if that doesn’t get addressed, what good is any of the other measures going to be?

HENWOOD: Well, they’re not going to be all that good. I mean, we could stave off the immediate crisis, but we’re not going to solve the long-term problem. Now, even if this bailout passed or passes in some form in the near future, I think we’re going to face years of a crummy economy. It’s going to be really hard to restart the mechanisms. I think they’ve really just run out of juice. And this old model, the whole neoliberal attempt to deregulate, you transfer incomes upwards, you break labor, you cut back on the public sector, all these things have been part of the real deflationary momentum to the economy and has forced people to borrow very heavily to maintain some kind of standard of living. We need to, I think, redefine what constitutes a good life, we need to get labor incomes up, we need to have a more generous public sector, and we need to have longer-term, very aggressive public investment in R&D and the development of new, clean, environmentally safe technologies. These are, I think, necessary for justice [inaudible] get the economy going again.

JAY: I mean, does this sector need to be bailed out? Couldn’t you have the same effect on the economy with a trillion dollars of investment in a green infrastructure program?

HENWOOD: Well, I think there’s an immediate crisis that has to be dealt with, which is why the financial sector needs injections of capital. Other countries that have run into these sorts of problems, they get out of them by injecting the banking system with capital one way or the other. That is just a necessary precondition to get out of the immediate crisis. Over the longer term you’re absolutely right: a green infrastructure investment program would be a great way, you know, to fulfill a lot of needs. It would be just and life-preserving, and also get the economy moving. So I think that’s the long-term solution. But for the short-term, I think we do have to address the financial crisis.

JAY: So I guess it’s safe to assume there’s going to be some kind of bailout package over the next week or two. There’s a brinksmanship game being played here. And I think some of the Republicans that are against it and Democrats want to show that they just didn’t toe the line, get a somewhat better deal for their own constituencies. But it’s hard to believe there won’t be something within probably a week to ten days. So, assuming that’s true and the market comes back for a little while, then what? ‘Cause from what I’m hearing, you’re saying there’s really not going to be enough to deal with the deepening crisis.

HENWOOD: No. You know, I think that those who voted no are going to be waterboarded and reminded of their class responsibilities. So we’re going to, I think, see a rethink in the coming days. But, you know, like I said, I think just staving off the crisis is not enough to relaunch any kind of boom or anything like a healthy economy. There are just too many structural problems that have to be addressed, and that is going to require some really long-term readjustments. And I don’t know if our political system’s capable of it. It could be that we’re just, you know, in some advanced state of dry rot, and there’s just no way we’re going to get out of this. But, you know, it’s going to take the kinds of aggressive public sector interventions that until now most American politics has been very reluctant to undertake.

JAY: I mean, you would think under these conditions Obama could come up with something, in terms of his vision, a little more courageous, but we certainly didn’t hear it in the first debate.

HENWOOD: Well, he’s a tame and centrist fellow. He’s a very thoughtful and he’s a very smart guy, he’s a very skilled politician, but his politics are sort of center-left, and he has a lot of support on Wall Street, so he’s not going to rock the vote. Now, you know, if things get really nasty and the political drama heats up—it’s already pretty hot, but if it gets hotter, then I think we’re certainly more likely to see movement out of him than out of a McCain administration. But right now, his instincts are not to do anything too bold and aggressive.

JAY: One would think what’s going on right now might freak out some of the corporate support behind McCain. Do you think so?

HENWOOD: Yeah. Well, I think his little trip to Washington was not very helpful. I think he’s just shown that he’s quite erratic and hotheaded, and I don’t think that’s the kind of temperament that’s necessary to calm a nation in crisis and to, you know, come up with solutions to get us out of here. He’s just too impetuous, too ignorant, and he thinks too much with his gut, and that’s really the last thing we need right now, and I think the more thoughtful members of the American elite understand that.

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