OESTERHOUDT STRIKES

BAIL ME OUT : GETTING BACK TO FINANCIAL NORMAL IN AMERICA

People will remember 2008 for several reasons. First, they will remember the year in which America elected its first black President. Second, they will remember why they elected a Democrat to office: There was a financial crisis going on. Since the early 20th Century, Americans have elected Republicans when there is no serious economic crisis at home. When Americans are cozy and comfortable with savings and homes, they vote Republican. But when free market Republican fun leads to bread lines, foreclosures, homelessness and billion-dollar savings and loan plunder, Americans finally say: "We need a Democrat." This popular reaction to free market excess propelled Franklin Roosevelt, Jimmy Carter and Bill Clinton to the White House. And the same trend put Barack Obama there, too.

Americans vote for Democrats when they want economic reform. If anything, Americans want financial success in life. As a general rule, they trust free market capitalism to provide their success. Republicans let private avarice run free. It works for a while, then the very avarice that drives enterprise consumes the entire economy. Since FDR, however, Democrats have significantly restrained the free market. Democrats understand that pure free market capitalism leads to exploitation and inequality. That is why Democrats traditionally stand for market regulation. Unchecked human avarice creates a perennial boom/bust cycle. The booms may be wonderful for some, but the busts are devastating for all. Democrat-driven regulations aim to soften the busts, even if they make the booms less euphoric. Bureaus such as the SEC and the Interstate Commerce Commission make "doing business" more difficult, but they protect the American public from abject financial ruin if things go awry.

What happened in 2008 to make people vote Democratic? For eight years, Republican control led to extreme laxity in economic regulation, especially in the credit industry. Americans were allowed to take out loans they could not hope to repay, leading to a fraudulent economy based on phoney money. The Federal Reserve repeatedly lowered interest rates, submerging the economy with ready cash. This led to runaway lending and borrowing that exceeded people's actual wealth. In 2008, the house of cards collapsed. When banks began calling in their loans, they discovered that virtually no one could afford to repay them. Foreclosures began. Mortgage values exceeded the value of the land they secured. Americans lost their homes. Banks failed. Consumption declined. Retailers folded. And because the stock market is intimately tied to all these economic fields, it, too, began to disintegrate. Retirement funds vaporized as their underlying stock values plummeted. With money disappearing, employers cut jobs. Unemployment rose. Economically, America descended into chaos. The Dow Jones Industrial Average lost over 30% of its value in less than two months.

Americans take action when their economic fortunes sour. In 2008, their fortunes soured in the worst possible way. They lost their homes and their savings, the two most symbolic forms of lifetime financial success. When Americans lose the things they've worked their entire lives for, they make changes in their government. Intuitively, they knew that Republican deregulation created the Wild West atmosphere in which the financial crisis materialized. By electing Barack Obama, they put their foot down on the free market free-for-all, just as voters put their foot down on Herbert Hoover in 1932. In one way or another, they understood that easy credit is not the best thing for the American economy. By electing Barack Obama, they impliedly gave their consent to stricter governmental intrusions into economic life. That means more bureaucratic hoops for businesses, more stringent lending requirements for banks and more financial oversight. If such measures prevent economic ruin, Americans are willing to embrace them, just as they tolerated FDR's reforms in the 1930s.

But how will government address the credit nightmare? For many years now, deregulated lenders have allowed Americans to fabricate their economic lives. They have created an illusory economy in which people believe they can buy anything for $19.99 per month, including real estate. Rather than create an economy based on tangible wealth, lenders created an economy based on the strained capacity of an individual's income stream to make minimum monthly payments. That is not a healthy economic prescription. Before the election, Congress hastened to pass a "bailout package" that will supposedly put the economy on an even keel. Truthfully, I did not examine the legislation before it passed, and I still really don't know how it functions. In the last several weeks, however, I have made some disturbing insights into what "the bailout" means.

First, I learned that the bailout will keep large lending operations in place. For better or worse, the American economy has become a debtor economy. Money moves only when credit is available, no matter how unqualified the creditor or the debtor. Thus, the bailout stakes its efficacy on the assumption that America simply "needs to get back to normal;" in other words, people need to be able to borrow beyond their means. If the banks struck out the first time, we just need to let them go to bat again--at government expense. This mystified me.

But there was another, more insidious dimension to the bailout. The federal money was going to the "major lending operations." In other words, massive private banks had failed, and now the government was going to cover their failures. Why reward a bad business? Should the bank executive who earns $500,000 a year be kept in his position despite his proven failure? Individual debtors--who suffer worst in this financial crisis--receive no such "get out of jail free" card. Individuals who lose their homes because greedy bankers gave them undeserved loans receive no mercy under the bailout. This genuinely bothered me because it reflects a fundamental inequality between rich and poor. Both rich and poor contributed to this crisis. Yet only the rich receive governmental grace. That is not right, no matter what any lawyer technically argues otherwise.

I got another insight into the bailout yesterday while listening to the radio. I listened to an advertisement from a car credit company. It said something to this effect: "Do you owe over 10% interest on your car loan? Wouldn't you rather get a single-digit interest rate? Well, thanks to the bailout plan, we can consolidate your loan and get you the single-digit interest rate you've always wanted. Don't be afraid to take out loans. Our bank has relationships with nationally-known credit unions and other banks. The bailout plan has made it possible for people to get loans again. Under our special plan, even those who otherwise would not be able to get credit can get credit through us. So don't wait. Call today to get the interest rate you've always wanted...blah blah blah."

Is this what the bailout plan does? Does it simply allow banks to resume all the bad practices that led to the financial crisis in the first place? After spending $700 billion on the bailout, where have we advanced? Banks are using the money to continue lending to unqualified borrowers (ie, "even those who otherwise would not be able to get credit through us"). This might stimulate short-term economic growth, but in the long run, it will lead to the same bad end. After all, runaway lending created the rotten economic structure that collapsed in 2008. If the bailout merely allows banks to resume runaway lending, what makes the government think that the structure will not collapse again? To be blunt, the collapse will happen in the time it takes the banks to spend the $700 billion. And the collapse will come even quicker if banks keep up their advertising practices, which hoodwink people into thinking they should borrow money when they actually can't.

I hope I am wrong about the bailout. I hope that President Obama and a Democratic Congress will enact necessary regulations to prevent further financial crises based on uncontrolled lending. After all, Americans did not elect a Democrat to simply "get things back to normal." "Normal" was bad in 2008. The election showed that Americans want to scrap the "normal" and embrace something new. Yet as it stands now, it appears that the bailout merely restarts the "normal credit practices" that destroyed the economy in the first place. This sounds illogical, but it appears true.

I am confident that Congress and President Obama will soon perceive the thematic problems with the bailout. America does not want to "get back to normal." It wants a complete economic overhaul with new, meaningful controls on rampant free marketeering. I am confident that the new administration will modify the bailout to put those new controls into place. I do not know what form those controls will take. But I think it safe to assume that they will address the underlying ills that led to the financial crisis: Overavailable credit, nonexistent regulation, unfair incitements to borrow and phoney wealth. In the coming years, I predict that government will embark on a new, interventionist course in economic life. Americans will not forget the pain caused by the "Financial Crisis of 2008." And they will reference it to justify new economic controls, just as our grandparents referenced the "Crash of 1929" to justify the New Deal.