A Shadow Congress

If this week's bailout goes through, it will be a massive transfer of wealth from working Americans to the ultra-rich. But there is another aspect which is less obvious: this legislation is also a massive transfer of political power. Under the current agreement, the Treasury Secretary--a member of the President's cabinet--would have the authority to buy and sell assets at any price with no oversight or time limit. Traditionally, the legislative branch (Congress) has the final say on all spending; this is one of the "checks and balances" of the US system, intended to curb an autocratic President. If Congress agrees to grant this power to the White House, it makes itself that much more irrelevant, and makes the US that much less democratic.

It's possible that the White House will choose not to abuse this newfound power, just as they chose not to use most of the powers Congress has granted them in the past few years. But who in their right mind wants to take that chance?

Sept 25 update: An American economist gives a similar criticism here. (There are many others.) And the Monkey-in-Chief is playing the fear card again.

I just read that the current Treasury Secretary--the man who will have unlimited authority to reward or punish Wall Street--is a former CEO of Goldman Sachs, with a net worth of $500 million. The White House plans to send this man into a closed meeting with his former colleagues carrying a blank cheque, and somehow that will resolve the debt crisis. Un-fucking-believable.

Sept 26 update: I asked a friend of mine who has a PhD in economics whether this bailout is necessary. He says that, in fact, it is. The immediate problem is that there is financial paralysis--no-one in the US can buy or sell a house or get other large financing because the banks are not willing to lend to anyone. Under the current financial system, good debt gets bundled with the toxic sub-prime mortgages as mortgage-backed securities, and bankers don't want to risk losing more money. Due to poor record-keeping, it's impossible to know which debts are solid and which are toxic. (Or perhaps they stopped the music because they know they'll get a bigger bailout that way.) The longer this paralysis lasts, the more it will interfere with day-to-day commerce. The only way to avoid a deep recession is to clean the slate and restore lending confidence again. I asked him whether the government itself could lend money and thereby get the financial system going again--after all, they apparently have a trillion dollars on hand, and that way they could ensure transparency. He said that couldn't work because only bank employees have enough expertise to run a lending program of that magnitude and complexity. At that point our conversation was interrupted.

It's true that the financial system is so broken that it needs to be wiped clean, and soon. But a blank cheque to Wall Street criminals won't solve the problem--there needs to be strict regulation and accountability. The details don't all need to be in place tomorrow, but there needs to a coherent and sensible plan. Senior financiers knew all along that they would get bailed out, which is why we are in this mess; if we send a message that those who destroy the economy will get punished not rewarded, it will be a major deterrent to future MAD financing.

My preferred approach would be to use FannieMae and FreddieMac, which are already nationalized, to lend money under a new set of regulations; poorly financed banks would go bankrupt, as per the rules of capitalism, thereby wiping the slate clean of bad debt. Ordinary Americans would not lose their life savings because of the FDIC protections. There would still be hardship for a lot of people, but less than the hardship they will have if they give away a trillion dollars and have another financial crash in two or three years. In any case, there are many people in the US with good ideas who understand economics better than I do; I just hope Congress listens to them and not the White House.