In our nation's history, crisis has frequently brought fundamental change. Examples abound: the Civil War and the end of slavery; the Great Depression and the New Deal; the Civil Rights Movement and the Voting Rights Act; Bhopal and the Superfund Toxics Release Inventory.
Not this time. The economy is (apparently) hanging by a $700 billion thread as worldwide markets plunge. Yet the bailout bill that barely passed Congress did not address any of the root causes of this potential catastrophe.
The congressional debate did not lack for heated rhetoric though, such as this gem from House Speaker Nancy Pelosi, D-Calif.: "No longer will the U.S. taxpayer bail out the recklessness of Wall Street." Why not? Nothing in the bailout bill will deter another such meltdown. While it's true there was "thunder on the right," that was all about the use of taxpayer money, not cleaning the rot out of the system. On the left, there was mostly fog and a chance of drizzle. Nowhere was there a clarion call for systemic legislative reforms in exchange for these billions and billions and billions. Where were the reformers? More importantly, where were the Democrats? Mostly in the cloakroom, pressing for bailout legislation free from essential reform.
Now it is no mystery any longer (if it ever was) just how we reached this cliff. During the Sept. 26 presidential debate, Barack Obama summed it up well: "[W]e...have to recognize this is the final verdict on eight years of failed economic policies...a theory that basically says we can shred regulations and consumer protections...and somehow prosperity will just trickle down. It hasn't worked."
Great stuff! Then Obama demanded an oversight board to keep an eye on that $700 billion, a ban on parachutes and some vague help for homeowners. Not exactly a call to the regulatory barricades. After riding his white charger to the nation's capitol, Hopalong John McCain instead echoed Churchill: "This isn't the beginning of the end of this crisis, this is the end of the beginning." He then promised to end our dependence on foreign oil. Seriously. The Keating Five alumnus also blamed the very deregulation he has championed for the last twenty five years but offered no specific alternatives.
Elsewhere, there has been no shortage of proposed reforms: The nation's op-ed pages, television and radio waves and the blogosphere were full of them. Make sure taxpayers get full return; authorize bankruptcy judges to provide foreclosure relief; create new jobs. They just never penetrated the halls of Congress. Your elected representatives chose instead to cut taxes while borrowing $700 billion from the Chinese and the Saudis. Go figure.
Here are just some of the practices left unaddressed that actually caused this crisis: providing loans with dubious terms to anyone that could sign his or her name; chopping those loans into more pieces than a jigsaw puzzle, then selling them as increasingly complex financial instruments to unsuspecting buyers worldwide; rating those instruments as AAA with little or no basis and no transparency; making gazillions in transaction fees while leveraging (borrowing and then re-lending other people's money) as if there were no tomorrow; through "swaps" and other cool means, gambling that these borrowers would never, ever default, with little in the bank (so to speak) to cover the bet if it ever came due. It came due.
What Was Motivating Congress:
This bailout may be the biggest pig in the history of pokes. Yet those running Congress have told us to simply swallow our medicine. Here's why:
Fear: The Paulson Steamroller had many Members (although not as many as expected) terrified. At least privately, the leadership of both parties were told that without swift and decisive action, we could suffer a financial meltdown a` la 1929. Show us the money. We'll fix things later.
Complicity: While the Bush White House and Republicans are clearly (and rightly) taking the fall for deregulation run amuck, many of these same Democrats now wringing their hands and pointing their fingers were there at its creation. Repealing Glass Steagall, for example, the Depression Era law that built a wall between (regulated) commercial banks and (unregulated) investment banks was the brainchild of Clinton Administration Treasury Secretary Robert Rubin.
The Power of Money: Wall Street is an equal opportunity contributor. Bail out cheerleader and Democratic Senator Chuck Schumer is one of its most enthusiastic recipients. Calls for systemic reforms go unheard when both parties have their heads buried in the same trough.
Pie in the Sky: Promises aplenty were being made about a return to "sensible" (as opposed to "nonsensical") regulation once this crisis is averted.
So what now? The last time a bailout on this scale was tried was by President Herbert Hoover in 1931. He saved his Wall Street friends and delayed the "Fall" until after the election. Then the nation's entire banking industry collapsed. The recent bailout may be similar in leading to the election of Obama, but what a mess he'll inherit. What would FDR do?
Al Meyerhoff is of counsel to the Los Angeles office of San Diego-based Coughlin Stoia Geller Rudman & Robbins. He can be reached at alm@csgrr.com.