A friend recently sent a note reminding me that back in 2003, when some of us were warning about the dangers of the housing bubble, Alan Greenspan, the person most responsible for the housing bubble, was being knighted by the Queen of England. If we look at the list of banks and financial institutions that have crashed or now threaten to crash, we can find a long list of people who brought their companies and the economy to the brink of disaster and yet have received tens or hundreds of millions in compensation.
We can also find a long list of people in top policy positions, including the current Fed chairman, Treasury Secretary, and President, who celebrated the soaring house prices and loan excesses of the housing bubble. These people now expect to receive even greater authority due to the failure of their policy. This must stop.
There is no doubt that the world financial system faces unprecedented strains as a result of the incompetence of our business and economic elites. The collapse of the system of finance that we started to see last week would be a genuine disaster. We would not be able to carry through the normal financial transactions — using credit cards, making payments with checks, or getting money from ATMs — that are the basis of modern life.
However, we did get through the crisis last week with quick actions by the Fed and Treasury. There is no reason to believe that with comparable steps in the future, coupled with the raising the $100,000 limit on deposit insurance, as suggested by Jamie Galbraith, that we cannot keep the financial system operating.
Keeping the financial system alive, but in the intensive care unit, is not desirable. However, given the integrity and the competence of the individuals involved, it may be the best option.
Secretary Paulson originally requested a $700 billion blank check that he intended to shower on his friends and former colleagues in the financial sector. Fortunately, the Democrats in Congress balked and forced the Bush administration to back away from this position. President Bush is now willing to accept greater oversight, restrictions on CEO pay, and some commitment for giving equity in exchange for bailouts.
This is good progress, but reports indicate that President Bush is still refusing to change the bankruptcy code back to the pre-1991 rules and allow judges to rewrite mortgage terms in bankruptcy. This is not hugely important — the overwhelming majority of foreclosed homes do not end up in a bankruptcy — but President Bush’s refusal to budge on this issue doesn’t sound like the behavior of someone who is worried about the collapse of the financial system.
This raises the basic point that it is extremely difficult to trust this administration. It was good to hear President Bush say that he doesn’t want the CEOs that wrecked their companies to profit from this bailout, but does anyone believe that he will structure the bailout to ensure that this does not happen? Similarly, he has gone along with the idea that the government will get an equity stake in financial companies in exchange for buying their junk, but does anyone believe that we will get as good a deal as Warren Buffet did when he bought a stake in Goldman Sachs?
There can be no presumption of good faith from this administration. Unless the conditions are written in stone, for example specific rules that limit executive compensation using the same type of language that CEOs use when they sign contracts with their companies, there is no reason for the public to believe that they will get a fair deal in this bailout. The public should also demand that some genuine outsiders, representatives of labor, consumer groups and other non-Wall Street segments of society, have a direct oversight role in this deal.
If these demands are too extreme for the Bush administration, then they are not telling the truth about the financial crisis. If the risks are really as great as President Bush claims, then he should unhesitatingly agree to guarantees that will prevent the incompetents from profiting further from their incompetence. We shall see.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer. He also has a blog, "Beat the Press," where he discusses the media’s coverage of economic issues.