Much More Than A Bailout
This will go down as a landmark day for American political economy. Far more than a “mere” multi-hundred-billion-dollar bailout, the package passed by the Senate and House with the support of most of the establishment and both major presidential candidates, which can now be expected to be signed by Bush, is indeed revolutionary as few other changes in law and policy are. The Treasury now has unprecedented dictatorial powers and could feasibly be described as the primary player in the finance industry. This goes beyond the New Deal—FDR would have killed for such powers, if they didn’t make even him shy away. This is outright socialism, or even beyond in some sense, given how gigantic the financial sector is.
The original Paulson plan, as terrible as it was, was only a couple pages long. This bill is several hundred. It was passed, much like the Patriot Act, without meaningful debate. More details about the problems can be seen on this blog, as well as here.
One interesting facet, unremarked upon by many but commented upon, in all places, at the progressive blog the Daily Kos, is the lowering of reserve ratios, potentially to zero—making a final break between the money made by the banking system and even the limits of centrally managed fiat currency. (I know there are libertarian arguments for and against fractional reserve banking. Here’s Jeff Hummel’s in favor. But under the current system, with a highly regulated and centralized banking system, this seems to me like just one more limit to politically motivated inflation eliminated. It is not the market determining these ratios, at any rate.)
The biggest concern here might be one of precedent. There seems to be no limit to what the feds are willing to bail out or nationalize in the name of economic stability. As Higgs has shown, the credit crunch has been largely a myth. But the pain and stagnation we can expect to feel from this will be quite real. And while people have compared Bush to Hoover—as a supposed champion of laissez faire—the comparison is valid but with the opposite implication: Hoover, like Bush, was a grand interventionist, whose big government response to 1929 prolonged and deepened the Depression. Today’s actions may help turn a one-year correction into a multi-year depression.