Paulson’s folly

I’ll be writing a lot more about this in the upcoming issue, but at the risk of getting ahead of myself, I have to express my sadness at the goings on south of the border right now. The U.S. government is in the process of negotiating a bailout plan which will likely come in at close to double the cost of the Iraq war so far. We are told that this is regrettable but necessary in order to prevent worldwide financial Armageddon.

I’m not buying it. I think we have all been traumatized by ghost stories about financial calamities, and we are so frightened by them, that we will accept just about any lunatic policy proposal that promises to keep the boogey man at bay. Congress is debating a US$700 billion proposal to buy virtually worthless assets from hundreds of financial institutions that made out like bandits while the market was rising. The package will almost surely exceed a trillion dollars before it’s all settled. Nobody is even bothering to try to argue that this is right. Only that it is unavoidable. But is it?

We’ve had market crashes before. We’ve had bad recessions before. They’re not nice, but we survive them. Part of what has helped us survive is the distinction between private enterprise and public finance. Public finance should be used to address the damage from market crashes. If you had a trillion dollars to spend, you could do an enormous amount to help people hurt by a market crash. With a trillion dollars, you could create a public program to halt home forecloures, for example. You could go on a massive public infrastructure spending program to employ all the tradespeople hurt by the housing collapse (and address a huge and simmering long–term threat to the economy at the same time). That’s just two examples.

They have managed to terrify people, in order to convince them that this is the only way they could prevent a return to the Great Depression. I think they’re saddling our generation, and our kids generation with a greatly diminished future, for the sake of temporarily bolstering the status quo, and bailing out a handful of incredibly irresponsible institutions that ought to be allowed to fail.

Instead they’re blowing up another bubble…the tech bubble burst and flowed into the housing bubble. now the housing bubble has burst and is inflating a U.S. national debt bubble financed overwhelmingly by foreign capital. When it goes, there’ll be nowhere to turn for help.

FOR MORE: Paulson’s power grab