Saturday, September 20, 2008

The Wall Street Bail Out Is a Mistake

Last week I was interested in the Wall Street crisis for many reasons, one being that my
auto insurance agency was 21st Century owned by AIG. I was wondering if I had an auto insurance if AIG went bankrupt, but then it the federal government promised to bail it out, so I still have auto insurance.

Who to blame for the crises? Most people in mainstream media such as PBS blame Allan Greenspan, former head of the Federal Reserve bank, for not regulating the investment banks such as Lehman Brothers who were making wild loans on subprime mortgages. LA Times had an article today saying Europeans blame the financial crises on deregulation, Alan Greenspan, and greed. The left-wing Counterpunch goes further saying blaming the crises on neoliberalism, the ideology that free markets with little or no government regulation should dominate our economy. Neoliberalism has dominated U.S. economy since President Regan. Therefore blame Milton Freedman, the great guru of neoliberalism, and all his quack followers; also blame President Regan and his bunch of neoliberals followers including Bush I and Bush II. They repeated endlessly that deregulation wasn't necessary and markets should prevail.

We also should blame U.S. Senator Phil Graham who sponsored a legislation passed in the late 1990s that deregulated banks and investment houses, ending the Glass/Stegal Act that in the 1930s regulated banks and investment houses. Graham is now a major fundraiser and adviser for McCain who also solidly supported deregulation his decades in the Senate. We should blame Clinton and his Secretary of the Treasury Bob Rubin for pushing to pass Graham's disastrous piece of legislation that deregulated the banks.

Most everybody agrees that government needs to step in but Bush's stepping in so far has been a disaster. Bush has refused to help out distressed homeowners by giving them low-interest loans. Neoliberals have also kept down wages for 30 years, so wages have stagnated. Bush II's mismanagement has cost the country 600,000 lost jobs this year.

Now Bush's plans would worsen the economic crises. The New York Times said the government could spend money on rebuilding the country's broken infrastructure or doing a bail out of Wall Street. Bush II wants to spend $700 billion bailing out Wall Street--this same Bush II who said the country couldn't afford to spend paltry millions to expand Healthy Families giving health insurance to poor children.

The major problem with Bush II's proposal is that he wants the government to take over bad mortgages from banks to stabilize the financial system until the economy improves and people can buy homes a gain. Given lost jobs, stagnating wages, and difficult-to-get high-interest mortgages, who is going to buy houses in the next few years? Very very few.

I know one young couple with a year-old baby in a one-room apartment in Los Angeles and another young couple planning to have a baby in their one-room apartment in San Francisco. Neither can afford to buy houses in their cities. Bush II's plans will do nothing to improve anybody's income but instead cause average taxpayers taxes to go up to pay for the bail out which might amount to trillion dollars. Bush II's bailout plan is a recipe for one very very very very long recession.

2001 economics Novel Laureate Joseph Stiglitz says the first thing this country has to do to recover economically is end the Iraq War which has now cost $3 trillion dollars. The economist argues that to get out of a recession what the federal government needs is to stimulate the economy but it doesn't have the funds if it wastes its funds on the Iraq War. He argues that the longer the Iraq War lasts, the longer the recession lasts. Also, I'd add close all these unnecessary bases that the U.S. has around the world.

Reducing military spending overseas would free the money to give a real stimulus package like FDR's New Deal. A new government in Washington would rebuild infrastructure as FDR did through such projects as the Civilian Conservation Corps during the 1930s (CCC). The CCC not only built bridges, roads, post offices, and high schools which we still use today but also gave jobs to the unemployed. When you give jobs to the unemployed, then they immediately spend their wages, stimulating the economy. Further, a new administration could expand unemployment and food stamps. When you give jobs to the unemployed or more unemployment or food stamps, then the people immediately spend their wages or unemployment checks, stimulating the economy.

Further, FDR supported unionizing of blue collar workers, enabled them to eventually increase wages to join the middle class. The president & federal legislature can change its anti-union stances as well as get rid of anti-union legislation. With rise in unionization, wages will rise as they did in the 1940s and 1950s. With more people have jobs and higher wages, then people will have the income to buy homes so the housing market will naturally improve.

Instead of federal bailout of banks and investment houses who took on bad mortgage debt, the federal government should have a policy of switching high interest mortgages to lower, fixed rate 30 year mortgage, helping people to stay in their homes. The federal government after World War II gave low-interest housing loans to veterans, allowing thousands to buy homes for the first times in their lives. Low-interest 30-year mortgages would help stabilize markets and housing prices. Further, because investors speculated on housing prices causing them to go up astronomically, working people and middle class couldn't afford to buy houses in many urban areas such as Los Angeles. The fall of housing prices will make houses more affordable--that is a good thing.

Obama and the Democrats in Congress support some of these things. The Democrats in Congress want some housing relief for distressed homeowners included in the bailout package but the housing relief should be in a different bill. Also, Obama has promised to included money to rebuild infrastructure in his new administration. The rest of the |New Deal package--including removing anti-union legislation--people will have to struggle for. McCain sounds clueless. His major economic adviser is Phil Graham who got us into this mass. McCain's election will mean economic disaster for this country.

Let's get this very straight. FDR's New Deal, while not prefect, did help get millions out of dire poverty into jobs. The federal post-World War II packages of veterans benefits for education and low-coast housing loans helped more millions. We know what has worked in our economy. We know the neoliberalism has given us the present recession and Wall Street disaster. We need to junk the failed polices of neoliberalism. Government programs have worked in the past. We need to resurrect them.

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