From The Editorial and other articles in The Independent of London of November 4, 2008.

REUTERS/JASON REED
Obama speaks during his final campaign rally before the US presidential election in Manassas, Virginia, 3 November

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Barack Obama with his late grandmother, Madelyn Payne Dunham, who died on Monday 3rd November aged 86, and his grandfather, Stanley Dunham

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A tear for Madelyn: Barack Obama shows his emotions after speaking about the death of his grandmother at a rally in Charlotte, North Carolina, yesterday. Madelyn Dunham died at the age of 86 after a battle with cancer

From:  DOLLARS & SENSE - The Magazine For Economic Justice.

 http://www.dollarsandsense.org/archives/…

Dear Dr. Dollar:
Isn’t the “bailout” of Wall Street like having a rotten tooth extracted? The extraction is very unpleasant, but it beats the alternative. Even if the dentist charges an unreasonably high fee, I am still going to pay and have the job done. Later I will worry about taking better care of my teeth. So shouldn’t people quit complaining about the bailout, suck it up, and get the job done?
—Peter Wagner, Weston, Mass.

FINANCIAL CRISIS -

I do like thinking about the mess in the financial markets as a “rotten tooth,” for something is certainly “rotten” in the current situation. And there is a way in which the analogy is useful: just as we are heavily dependent on the dentist to deal with our teeth, we are heavily dependent on the banks and other financial institutions for the operation of our economy. But if we are going to use the dentist-finance analogy, we need to take it a bit further.

In particular, if the dentist who tells me I need my tooth yanked out in an emergency extraction is the same dentist who for years has been telling me that my teeth are fine, then I get suspicious. This dentist has been making money from me all along, and now, when the crisis of a rotten tooth emerges, the dentist stands to make more money while I incur the pain. The situation is similar to the bailout of the financial system: the banks keep their profits in good times, but the losses are imposed on the rest of us in bad times. At the very least, when the people responsible for a problem—dentists or bankers—tell me to solve the problem in a way that benefits them, I want to get a second opinion, figure out the options, and proceed with caution.

***

As we have been learning in recent weeks, there is more than one option for dealing with the “rotten tooth.“ In part because of public pressure (i.e., complaining), the Treasury shifted away from its initial plan to buy up the bad assets in the financial system and is now taking partial ownership of the banks by providing them with capital.

Not only is the second plan more likely to work (in the sense of preventing a breakdown of the financial system), but it is also more likely to cost the rest of us less over the long run (because as the banks recover and start to earn profits, the government will share in those profits).

There are other options that the U.S. government might follow as well. For example, the main reason we care about what happens to the banks is that their failures could spread to the rest of us, causing a severe depression.

But instead of working simply from the top down, the U.S. government would do well to work from the bottom up—by focusing on the problems of people losing their homes due to foreclosures and by providing a large economic stimulus program through spending on schools, infrastructure, health care, and other real economic needs.

***

And, just as with my tooth, if the problem really did arise because of the bad practices of those who were supposed to take care of the situation (wasn’t this the dentist who had been telling me all was well?), then we should give some immediate attention to proper regulation.

The current financial crisis could have been avoided but for the deregulation craze of recent decades. Fixing the deregulation disaster should not be put off to the distant future.

***

Regulation is not a panacea. There can certainly be bad regulations, sometimes brought about by the firms themselves in an effort to use regulation to secure their power and profits.

Establishing good regulations is a constant battle, as the large firms devote huge amounts of their resources to get deregulation or to shape regulation in their favor.

Yet without regulation, markets—especially financial markets—are prone to instability, and at times that instability can have severe impacts on the rest of us.

While the dentist analogy may be incomplete, it does bring out a very important point.

Because we are excessively dependent on the operations of a relatively small number of very large firms, when they get in trouble, we can be forced to bail them out. Not a good situation.

Indeed, the situation is made worse as the current crisis is leading to more consolidation of the banking industry; with the encouragement of the Federal Reserve and the Treasury, big banks are being taken over by even bigger banks.

At the very least, if we are going to allow some firms to become “too big to fail,” then we would do well to watch them pretty carefully—that is, to regulate them and thus do all we can to prevent them from operating in ways that put us all at risk.

[Full disclosure: Last month I had a tooth extracted and it wasn’t all that bad—certainly not as painful as the current Wall Street bailout! —A.M.]

Arthur MacEwan is professor emeritus of economics at the University of Massachusetts Boston and a Dollars & Sense Associate.

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OK, WE ARE BULLISH BECAUSE WE BELIEVE THAT BY NOVEMBER 5, 2008, WE WILL BE TALKING ABOUT THE SIMULTANEOUS ATTACK ON THE SEVERAL CRISES THAT MR. G.W.
BUSH IS PASSING ON TO HIS SUCCESSOR. THE MAIN TALK OF THE DAY WILL BE THAT HEALING THE FINANCIAL CRISIS, THE APPROACH WILL BE TO TURN THIS INTO AN
ENVIRONMENTAL OPPORTUNITY THAT WILL ALLOW THE TACKLING OF THE GLOBAL WARMING/ENERGY CRISES WITH TOOLS THAT WILL IN TANDEM HELP SOLVE THE PESKY FINANCIAL CRISIS.

Dr. Paulson’s Magic Potion Is Pure Poison for Us Writes William Greider, The Nation. Posted October 17, 2008.

The Treasury Secretary’s infusion of cash is a tonic for the bad boys of Wall Street. For a cure, we’ll have to wait for a new president.

American capitalism is having a nervous breakdown, losing confidence and acting out in self-destructive ways. Let’s try talk therapy. No, wait, it’s more serious — a case for high-powered drugs. No response? Maybe high finance has a brain tumor. Time for surgery! Cut out the bad parts and things will stabilize. Hold on. The patient is swooning now, gasping for air and trembling with seizures. Oxygen! Blood! We need a massive transfusion to rid the body of toxins. Doctor, the patient is flat-lining. What’s next? Shock therapy?

My mordant medical metaphor sounds a trifle cruel, given the massive losses people are suffering, but it roughly describes the stages of diagnosis and cures with which the government has hesitantly attempted to heal the collapsing financial system. Each new cure revives hope that the worst is over — at least until the symptoms start darkening again. The doctors in Washington changed their diagnosis once more when Treasury Secretary Henry Paulson announced his latest magical medicinal potion — a $250 billion relief package to be invested directly in stock shares of the nine largest banks and spread more thinly among hundreds of smaller banks. The stock market cheered wildly with a 900-point rally in the Dow, as well it might have. Wall Street had just secured a fabulously well-heeled investor. Oops. Two days later, the magic wore off and share prices plunged again disastrously.

This time Paulson is much closer to a genuine solution, but hold the celebration and keep your eye on the patient. The government’s new outline is deliberately vague about how exactly the Treasury and Federal Reserve intend to execute the details. The proposal implies but does not say that the government is taking charge of the banking system and will use its emergency powers to compel bankers to restart lending to restore the real economy of producers and consumers. Maybe that’s what Paulson has in mind, but he made no promises. The public money gives a comforting tonic to the bad boys of Wall Street, but it’s still packaged as a voluntary approach — not to be confused with the genuine nationalization that Britain and other governments have undertaken.

Nationalization is the “shock therapy.” We may yet see it before this turmoil is ended. Naturally, it is ideologically offensive to the Bush administration, and especially to Paulson’s old colleagues and rivals on Wall Street. Taking control would impose on the government the daunting challenge of reshaping these large and overbearing institutions, winnowing out banks that deserve to die and instilling in the survivors formal obligations to serve the national interest they have willfully betrayed for a generation. That task will probably be left to Paulson’s successors.

Without taking explicit control, the government is simply betting the bankers will cooperate in exchange for rescue. Maybe they will start lending again, but maybe not: banks are in a deep hole of their own making, having lost more than a trillion. Typically, they apply tightfisted lending tactics to heal balance sheets — the opposite of what the country needs from them now. The $125 billion or so targeted for the nine biggest banks will not be enough to heal them all. Institutional Risk Analytics, a bank monitoring firm, says $250 billion in capital injections “will be just the down payment to get through the wave of loan losses headed for some of the larger players in the US banking sector.”

Meanwhile, the money provides a feel-good tonic for the club — the relatively small congregation of financial institutions that exert such oppressive influence over business and society, not to mention politics. Paulson is handing them cheap money (ours) that will initially earn only 5 percent, even as Warren Buffett gets 10 percent dividends on the capital he provided Goldman Sachs. Nor does the public get a controlling interest, or even seats on the board, for its generosity. The choices Paulson makes as he hands out the public money will effectively design the future — making the big boys even bigger and more arrogant, since they know the government will not let them fail. Informed financiers already see the nine largest banks consolidating into four behemoths. The next president and treasury secretary (if they have the nerve) will have to confront this question of scale and cut the big banks down to size — small enough to fail without damaging society.

Dr. Paulson’s latest cure has once again left out something important — American society at large. There’s a lot of cheap talk about Main Street, but nothing in this plan helps the folks who are taking it in the neck through bankruptcy or unemployment. When Paulson met privately with the CEOs from the nine leading banks, he presumably asked them to be kind to the debtors. He ought to have commanded the bankers, one by one, to stop foreclosures, roll over debts and give people time to work their way out of their predicament, or else government would shut its lending window and dump the banks’ stock.

Fortunately, Bush and Paulson are lame ducks. They will be replaced soon (we fervently hope) by Barack Obama, who is addressing the side of the crisis that Republicans always ignore — what’s happening to the people. Obama has revised and expanded his agenda, and he does not intend to wait until January. Many of his proposals can be undertaken right now by Treasury and the Fed. Others can be swiftly enacted by Congress in a lame-duck session right after the election. If bitter Republicans wish to filibuster or Bush wants to veto, that will simply deepen their party’s shame.

John McCain responds to the crisis with grandly irrelevant ideas like cutting the capital gains tax in half, but also useful ones like reducing the tax rate on withdrawals from IRAs and a mortgage plan similar to the New Deal-era Home Owners’ Loan Corporation that Hillary Clinton has led many Dems in proposing. Obama proposes smaller but concrete measures like a ninety-day moratorium on home foreclosures. Banks that receive government aid would be told not to act against families trying to make payments, even if they are behind. Bankruptcy judges would be authorized to modify mortgage terms. Families could withdraw money from retirement accounts to pay bills without being penalized. Obama would extend unemployment benefits and suspend taxes on that income. He would give small businesses a $3,000 tax credit for each new job they create, and distribute $50 billion to states and localities to finance roads and bridges and to make schools energy efficient. He would double the capital loan to the auto industry, to $50 billion.

These and other proposals are of course excellent fodder for the closing days of the campaign. But they also suggest the Democratic candidate is moving rapidly to adapt to the crisis that awaits the next president. Economic turmoil has instilled a dynamic process in politics, driving everyone, including voters, to new ground. We are likely to see even larger changes in the coming months. The treasury secretary seems out of breath. Obama appears to be getting his second wind.

William Greider is the author of, most recently, “The Soul of Capitalism” (Simon & Schuster).