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A Modest Proposal
Bailing Out The American Economy
Terrell E. Arnold
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.
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.
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.
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.
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.
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.
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.
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.
(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.
(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.
(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.
(4) As Europeans are now pressing, implement a global system of best practices in which the United States becomes a leading player
(5) Shut off the Ponzi schemes that permitted the pyramiding of derivatives that have made a shambles of home financing markets.
(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.
(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.
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.
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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