Big Bailout, Bad Mojo

The various schemes proposed by both liberal and conservative forces to try to save the American economy from its swan song are wrongheaded and, ultimately, doomed to fail. What is needed is not a shoring up of the existing system—the one that led to this problem to begin with—but a change in the entire values system that underlies what we currently do. Since this is unlikely, the future looks troubled.

Let’s start with the problems. Arch conservatives contend that the Big Banks and the Big Three should just be allowed to fail. The market is the market, and thems the breaks, they say. The Market Almighty has spoken, and He has said that these businesses are dead; redress for redemption is pointless. In this scenario, the layoffs and the suffering of ordinary people who had nothing to do with the fraud and mismanagement that caused the crisis are regrettable, but necessary to keep things The Way They Are. Perhaps, if you’re smart, like the guys at Goldman and Citi who still managed to chalk up billions in bonuses despite their incompetence and malfeasance, you’ll be reborn into the post-crash New Economy as an exalted being.

The problem with this approach is that it turns an amoral free market system into a positively immoral one. The free market does not work unless those who are responsible for taking unnecessary risks are punished, either financially or through the loss of their positions, or, preferably, some of both. This is why we allow these people to run free even after they do things like this, whereas any small-time confidence man would be thrown in the pokey if he gambled away even a billionth of what the power-brokers on Wall Street evaporated. Instead, the working people are punished with job loss and insolvency for the crime of just showing up and doing their jobs. And woe be to those working people who managed to save a little money in a 401k: they, too, have been forced by the market to place their money into a scheme that aggrandizes the market, not one that gives them a stable return.

If we want to return “trust” to the system, we need to find the people who created collateralized debt obligations full of bad loans, the people who wrote the bad loans in the first place, the people who rated these bad instruments AAA, and the people who headed the companies who did this (and who are therefore ultimately responsible) and put them in jail. Pro-business commentators will argue that this is impossible, but the records these companies kept were necessarily better than those kept by low-level drug dealers, and we manage to jail millions of those. To a halfway competent prosecutor, this shouldn’t be much of a problem.

The real reason we don’t is that doing so would reveal that the system is sick to begin with, but more about that later.

The problem with most liberal approaches is that they throw money at the current system which is, at its heart, hopelessly flawed. These schemes fail to fix the basic problem. First of all, bailout money even with conditions is not the same as an investment: oversight might help a little, but it won’t give the taxpayers anything to own after the current heads of the banks and the auto companies screw it up again, which they inevitably will.

That’s too bad, because temporary public investment worked well in a banking crisis in Sweden in the 1990s. The Left won’t do this, though, because they’re still afraid of Rush Limbaugh calling them socialists.

But even that isn’t really a long term solution. A massive bailout might work in the short term to get consumers spending again, but much of that consumer spending is destined to float overseas. Indeed, with 70% of our economy being consumer spending, and with the vast majority of consumer goods made overseas, it doesn’t really matter if the bailout is direct in the form of stimulus or indirect in the form of tax breaks; most of it will end up in China. Obama’s plan to invest in infrastructure at home will help a little, but when the projects end, the jobs that go with them end, and then we’re back to dysfunction as usual.

That dysfunction is exactly what every free market advocate since Reagan has called for. Management decided a long time ago that manufacturing was too expensive to do, primarily because it decided that the American worker was too expensive to employ. Unlike Henry Ford, who had the common sense to realize that if he didn’t set a decent wage he wouldn’t have many customers for his cars, the current free market perspective dictates that any expense must be cut out of a business for it to run efficiently, even if that means, in the end, gutting the very economy that buys from those businesses. And so steady, good-paying manufacturing jobs were sent overseas where they were cheaper, plants were shut down and opened overseas where they were cheaper. The unemployed found their way into lower-paying and part-time, and often temporary and high-turnover, service industry and retail jobs. Retail space exploded, filled with shiny, new, cheaply-made and highly profitable goods from China.

But the fundamentals weren’t there. As Barbara Ehrenreich discovered in the late ’90s and wrote about in Nickel and Dimed, those who work at Wal-Mart are not even able to afford to buy the stuff they sell at Wal-Mart. So consumers turned to credit, which Alan Greenspan and others made sure to make readily available and cheap. When the credit ran out, the economy collapsed. That the latest, greatest bubble began in real estate is telling: with all other sources of income tapped out, Americans started drilling into the asset they lived in for that last consumer harrah.

Behind all this is an overriding and dangerous assumption: that profits should, from year-to-year, continue to rise. This expectation, reinforced by market analysts and shareholders alike, is what led businesses to outsource in the first place. Outsourcing drove costs down and profits up in the short term, allowing companies with otherwise flat earnings to show a temporary gain, keeping up, for then, with the expectations that earnings must rise from quarter-to-quarter. That masked the fact that the market for the goods sold were essentially flat.

Consider the insidious effects of our expectations of continual growth. A local business, the airplane manufacturer Cessna, began a series of massive layoffs recently, cutting 30% of its workforce. They did this not because they weren’t profitable: indeed, the company is still on track to make over $100 million in 2009. They cut all those jobs because they made almost $300 million the year before. In a financial world in which success is measured by continual growth of profitability, Cessna is in a tailspin, even though the company is still making a decent amount of money and could easily afford to maintain full employment at least through the next fiscal year.

But the investors wouldn’t have it, since it would mean that they’d lose their earnings expectations. The company would be in better shape if they didn’t have to rehire when the market bounces back; they’d be more solid in the long term, but investors can’t have that. It isn’t good enough not just because investors are greedy, but because on the whole we invest to keep up. We invest because we must if we wish to retire into a future of inflated prices and increasing uncertainty. Saving at a bank—what was once considered the safest of things to do with one’s money—will only return a rate of one or two percent a year. This barely keeps pace with inflation, and in many years falls behind. Savers are punished and investors are rewarded, so we’d be fools not to invest in a 401k to put into the market . . .

. . . which brings us back to the problem to begin with. Free market advocates have created an economic environment that forces us to be investors. This gives Wall Street more money to play with, further cranking up expectations for returns, further pushing purely financial instruments, like CDOs for instance, pushing more outsourcing, and deepening the chasm into which we have fallen. We are all implicated, even if most of us are innocent.

Our situation is absurd. Yet for all the obviousness of this statement, no one who comments on our current financial troubles is willing to say that our values are to blame. No one is willing to say that perhaps we should begin to idle back our expectations of what our economy is supposed to do. I had hoped that the precipitous nature of the downturn would force a little soul-searching on our nation, a little rethinking of the relationships we all have to the system that, as the anthropologists say, is the means a culture uses to exploit its environment to assure its survival. But that does not appear to be the case. Since really fixing our problems involves looking at our values and adjusting those for our realities, and since that is too frightening a prospect for all of those—on the Right and the Left—for whom the system has created disproportionate wealth in the past, we are doomed to ride this bird into the ground. And if not this one, the next, or the one after that. It’s a cycle of ever-diminishing returns on a system moribund at birth.