- Jonathan Swift, the 18th century English writer, once
shocked the English public and, indeed, the literary world with his piece: A
Modest Proposal: For Preventing the Children of Poor People in Ireland
from Being a Burden to Their Parents or Country, and for Making Them Beneficial
to the Public. His proposal, simply put, was that Irish families should
sell their babies to be used as food for the rich. Swift, a master of fantasy
that approached the science fiction of later years, was only kidding, but
he did raise public awareness of the dire circumstances of the Irish. Unfortunately,
he offered no solutions. Last night President George W. Bush put forward
an equally extreme and perhaps equally off target remedy for the American
economic situation: A plan to reward the rich for having screwed up the
system, while mostly blaming the poor for having tried to better their
situations by stretching to buy a home.
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- As in most serious economic crises, the central question
is not who is to blame (granting that is important) but what needs to be
fixed. Start with the fact that the basic American financial system is
intact; the trouble is at the top. And the trouble is at the top because
of the accumulated consequences of bad judgment and greed. Well before
Bush's speech last night, public awareness of the subject was high. Members
of Congress are getting voluminous mail that largely rejects the idea of
the narrow bailout proposed by Bush and recommended by Treasury Secretary
Paulson and Fed Chairman Bernanke. Meanwhile, virtually every useful idea
of consequence for fixing the problem has been widely discussed on the
Internet and in mainstream media. There is no real chance of originality
at this point, and none is claimed here. But there are several elements
to be crafted into any fix that emerges from the Congress.
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- First, forget the notion that the only problem is how
to make the investment banking system whole. That is simply a crony satisfaction
challenge. To be sure, as German and other European voices are asserting,
the nature of international finance is permanently changed. Specifically
the roles of New York and London investment bankers, if they survive the
situation, will never be as large or as influential as they were before
this crisis. More important, that new reality cannot be overturned by pouring
in good money after bad. Investing $700 billion taxpayer dollars
in an attempt to make the system whole is simply a fool's errand.
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- Operational, regulatory, attitudinal, and real financial
adjustments must be made. First, the highly speculative, profiteering motivation
that has driven investment banking into the cesspool of hedge funds and
derivatives must be forgotten, at the very least sharply curtailed and
subjected to sensible laws. Maintaining and improving a complex and
demanding global economy are not just about making money. They are about
collecting, conserving, effectively applying, and sharing the world's resource
pools. They are about effectively regulating systems and, as members of
the Group of 8 have urged, adopting best practices that apply across the
board to the world financial system. They require recognition that the
nation state is no longer free to act narrowly in its own interests if
those acts have deleterious impact on the rest of the system. They are
about making profit horizons more realistic, less devoted to making the
rich richer, and more dedicated to serving the equities and growth/sustainment
needs of the whole system.
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- The starting task is to recognize that the long term
solutions to this crisis are the primary responsibilities of governments,
not of private bankers. Private investment bankers have just demonstrated
conclusively that they cannot be trusted in this role. The global facilitative,
growth, and maintenance functions of the financial system are too important
to leave to institutions dedicated to profit. We need a system that allows
room for profit, but is not left unregulated to founder on it.
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- The Bush, Paulson, Bernanke plan fails on all those counts.
It is about preserving a system that just demonstrated a built in capacity
to self-destruct. So what do we do? We work on several aspects of the current
situation while buying time, because the whole situation is not fixable
in the short run.
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- The United States needs urgently to address some environmental
imperatives. First, US leadership and the American public must face the
reality that the United States cannot sustain its superpower position by
borrowing money from itself and from outsiders. America's current
debt approaches a whole year's domestic product, upward of $12 trillion.
And that situation will be made materially worse by borrowings, both domestic
and foreign, to finance the Bush-Paulson-Bernanke fix. Second, other countries
such as China, India, Brazil, the combined members of the European Union,
and several Asian countries are growing with a pace and solidity that represents
enduring redistribution of world economic power. Third, America's habit
of the past few decades of transferring productive activities abroad (outsourcing)
is undercutting the capacity of the country to sustain its own employment,
and that disturbance is being augmented by progressive automation of productive
processes.
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- In this situation the recommended remedies are more modest
and focused than the broadside attempt to revitalize a failed investment
banking system. There are about seven realistic steps that should be taken.
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- (1) Make clear that the investment banking system must
absorb a significant part of the costs of the transition. That means NO
whole-hearted bailout.
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- (2) As many have suggested, the culprits should not profit
from their mistakes. Any funding provided to alleviate the investment banking
situation should be carefully watched to see it does not go into banker
pockets.
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- (3) The regulatory environment that has decayed in the
Clinton and Bush administrations must be restored and in significant areas
enhanced, e.g., insistence that the banking system meet reserve requirements,
possibly even enhancing them.
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- (4) As Europeans are now pressing, implement a global
system of best practices in which the United States becomes a leading player
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- (5) Shut off the Ponzi schemes that permitted the pyramiding
of derivatives that have made a shambles of home financing markets.
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- (6) Freeze the interest rates on home mortgages at entry
levels for the subprime adjustable rate mortgages for at least the next
two years while enduring changes in mortgage regulation are put in place.
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- (7) Return the country to sensible observance of lending
practices and stop the usury that now dominates credit card lending. Credit
card lending has become an even larger Ponzi scheme than subprime mortgages,
if that is possible, and real cuts in permissible rates are vital to the
country's, and to many individual's financial health.
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- Not one of these actions is unreasonable. All require
the President and the Congress to prove that ours actually is a government
of the people, by the people, and for the people. It is not a policy-making
extension of Wall Street. The real stretch required here is that Bush and
the Congress serve their true constituencies, the 300 million Americans,
and not just the clusters of cronies who inhabit Manhattan and other financial
markets.
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- The writer is a retired Senior Foreign Service Officer
of the US Department of State. He served in key economic interest countries
such as Egypt, India, the Philippines and Brazil. He has an MA in political
science and economics from San Jose State University, he is a graduate
of the National War College, and he studied development economics at the
University of California, Berkeley. He will welcome comments at <mailto:wecanstopit@charter.net>wecanstopit@charter.net
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