Some market observers opine that we ought to be thankful for the fiscal stimulus provided by Paulson’s Troubled Assets Relief Program (TARP). They argue that the U.S. economy would be in a deep hole without TARP. Probably. But that deep hole might be a better spot than the deeper pit of lost governmental legitimacy we now find ourselves in as TARP socializes the investment errors of wealthy speculators. It may be that the Secretary of the Treasury’s radical action will help us skirt a severe recession and even partially re-inflate capital assets in the near term. But what will be the true cost of this stimulus if we lose our republican heritage as trust ebbs away?
The decision to circumvent an economic depression by using massive amounts of new debt to save wealthy speculators from their mistakes now traps us in a greater calamity. It is far worse to lose governmental legitimacy through money supply inflation and preferential bailouts than to endure a painful economic downturn, especially when the lost legitimacy mortally wounds the most storied free government in history. A depression can be surmounted with leadership integrity, public resolve and a new prudence. But monetary injustice as the governance ethos leads to calamity.
There remains the question of whether the U.S. economy in late 2008 weakened profoundly because of Paulson’s vision of a looming financial Armageddon. Paulson pulled out all the stops to get Congress to ratify a version of his bailout plan. What if Secretary Paulson had taken a different approach with early transparency and less doomsday rhetoric as context for his demands? What if Paulson had instead insisted that the elites who plundered financial institutions be held accountable to rebuild the institutional balance sheets they impaired?
Mounting evidence suggests that key U.S. officials put the interests of Wall Street ahead of their country’s true interests. Why else, for example, did Paulson demand near-immunity for himself and provide bailout funds with little accountability? There is a viable argument that the “spend everything” autumn strategy of the Fed and Treasury not only spooked markets — evidenced by equities’ continued decline for weeks — but undermined consumer confidence. Granted, the Treasury found it easy in the context of declining stock prices to issue massive sums of short term debt. Frightened investors had to put their money somewhere. But what happens when the prospect for treasuries begins to take on the uncertainty of equities?
Treasury defenders argue that interest rates are going to stay low for a long time. Such confidence may be misplaced with nearly two trillion dollars of new debt on this year’s horizon (and possibly more if Congress cuts business taxes). Give interest rates a little time and the Treasury may think a boycott is underway. Why? Because the U.S. government sold the credibility of its justice to service Wall Street elites who were carrying too much leverage to capitalize upon a recession of this nature.
Do the benefits of TARP outweigh its costs? Do we gain anything by not taking our lumps now to live within our means? If we stave off accountability, what will the end-game look like when government no longer has the wherewithal to make good on its guarantees without debasing the currency catastrophically?
TARP made it possible to throw tens of billions into black holes without restoring heavily leveraged financial institutions. Initially, the public resisted Paulson’s proposals, only to cave in. Too many people were carrying too much debt to remain solvent through a prolonged deflationary recession. With so many families dependent upon two incomes to pay for mortgages inflated by an ATM approach to home equity extraction, voters had little choice but to capitulate to a bailout of elites.
When an economic contraction occurs after a boom that has massively increased the wealth of elites, someone must pay. Elites should have been made to pay up, not just in terms of current bonuses but in terms of assets greedily acquired in an environment of unfair laws. Instead, government bailed them out, crushing middle class confidence that elected representatives would preserve justice and the public interest. This outcome is not surprising when one considers that many elected and appointed officials have vast wealth in blind trusts; wealth that rises or falls with speculative markets. No wonder national legislators serve elites’ first, since elite interests overlap their own in financial matters.
What message does government send when it provides financial institutions with unfathomable amounts of money so that their hedge fund borrowers can stay with their bets while government attempts to re-inflate markets? This is no longer government by the people and for the people, but government by the rich and for the rich (i.e., plutocracy). This is America’s vexing confidence problem now!
Our nation’s confidence problem will not be resolved because a greater financial crisis looms as more debt is piled on. The middle class has ample reason to expect that the hedges of elites will be better calculated next time, giving them opportunity to exploit the next crisis more ably. The middle class now lives with the frustrating knowledge that they will be made the primary losers when the federal government becomes unable to service its mounting debt. The new financial architecture that Congress will pass in 2009 will have the trappings of needed reform but will continue to protect irresponsible stakeholders ‘too important to fail.’ This moral hazard sounds the death knell of the Founders’ vision and heralds the advent of democratic plutocracy. Don’t think for a minute that some elites failed to calculate long ago that this type of crisis would be their pathway to greater power. We’ll continue to have a form of constitutional government but its effect will be for tradition and show, much as monarchy’s place in England.
The federal government claims it is reaching out to working class people as it subsidizes changes in mortgage terms. In reality, such programs are designed to strengthen bank balance sheets. Mortgage write-downs that stimulate price inflation will help most corporations grow revenues, thus empowering Republican legislators who serve corporate executives. Meanwhile, the write-down of mortgage principal transfers wealth in favor of ‘late-to-home-ownership’ groups in metropolitan areas, advantaging their Democratic representatives who largely serve Wall Street. This preferentialism benefits special interests on both ends of the economic spectrum. Everyone else in the broad middle pays their fare. This is a disaster for a republican meritocracy and a strike against the principles that made this nation once great.
Since there isn’t enough money in the world to fix the problems caused by mammon-grubbing elites, the public has every right to despise a TARP that empowers elites without measurably improving the country’s long-term prospects. The TARP serves as a symbol that democratic plutocracy is already coming out of the shadows, emboldened by public confusion.
In sum, it is irrational to claim that without TARP we would be in worse condition. Our $700 billion TARP is one expression of the cultural disease that leads us to national calamity. Moral hazard is now the pastime of our political leaders. A country built on the goal of justice for all cannot long survive when injustice overwhelms the macro-economy. Americans are more likely to believe they can survive a great depression than to have confidence that their country can survive the policies it has wrought. After all, a democratic plutocracy would not be America but a surreptitious overthrow of our constitutional principles and traditions.