September 22, 2008

New York -- Obviously the collapse of the financial markets has taken over the political discourse. And while I don't have a lot of expertise, I do have some questions, based on what I learned in a college class in 1966. The professor, John Kenneth Galbraith, one of the great experts on the Depression, predicted this moment almost exactly. He told my class that "the financial bubbles that led to the Depression will return as soon as America is led by politicians who didn't live through it. Capitalism has no permanent memories, but one of its permanent vices is gambling with other people's money. So a post-Depression generation politics will dismantle the safeguards the New Deal put in place, and another financial collapse will then be inevitable."

Sure enough, by the end of the Clinton administration two post-Depression Presidents had deregulated financial markets. And now the government is telling us we have to bail out Wall Street for the gambles they took -- but not to restore the money lost by the ordinary homeowners and credit card debtors who were the real victims.

So a few questions come to mind --

This morning's New York Times says that the decision by Goldman Sachs and Morgan Stanley to reorganize as integrated investment/consumer banks takes the financial sector back to where it was in 1928 -- the very structure that caused the Great Depression. Is this really where we ought to go?

Much of the bad paper that is dragging down the financial sector is bad because homeowners and credit card debtors got stuck with very expensive loans. And no one believes that investors will get more than about fifty cents on the dollar. What would happen if we gave $700 billion to average people and helped them renegotiate their debt down by 50 percent? Could that have an equal benefit on financial markets while keeping more people in their homes?

People are losing their houses in part because their mortgages are too high. But they also can't afford their utility bill and the cost of driving. If we massively retrofitted homes and offices to reduce energy waste and lower utility bills, and aggressively improved vehicle fuel efficiency, might the return on those investments be higher than what Secretary Paulson is talking about?

The amount being talked about -- $700 billion -- is roughly equal to this year's bill for imported oil. So if we really took ending our addiction to oil seriously, we could repay the Treasury for the bailout -- and it's hard to see any other pot of money lying around big enough.

So presumably we do need to do something, but we ought to ask a lot of tough questions. Because the administration that is asking for a trillion dollar blank check, when all is said and done, is the same one that completed the process of taking us back to 1928.

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