Economics and Pocketbooks

The Wall Street Bailout: What About Main Street?

By Jonathan Weber , 9-23-08

	Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke (right).

As Treasury Secretary Henry Paulson, the former head of Goldman Sachs, seeks $700 billion in taxpayer support to bail out his former colleagues in the money business, the question on my mind - and probably on yours too - is, What about me? Where’s the bailout for my cratering IRA, or for my suddenly-way-less-valuable house? Where’s the help I could sure use in keeping my company, and the jobs (with benefits) it provides, healthy and growing? And what will this all mean for the economy of the Northern Rockies?

On that last question, I’ll offer a plug: come to our Real Estate and Development in the Northern Rockies conference, this Oct. 23-24 in Missoula. We’ll be featuring four leading regional economists: Chris Thornberg of Beacon Economics, who largely predicted the current situation when he spoke at this event two years ago; Toby Madden of the Federal Reserve Bank, the institution which will be largely responsible for the rescue plan; Larry Swanson of the Center for the Rocky Mountain West, who for years has tracked the underlying dynamics of growth and change in the West; and Dave Eacret, the go-to economist for anyone investing in North Idaho.

We didn’t plan it this way, but the conference is shaping up as an exceptionally valuable venue for understanding the financial crisis and what it means on Main Street.

On the first two questions, I don’t have such simple suggestions. But I do think the obvious unfairness inherent in the rescue plan will have a dramatic, long-term impact on our perceptions of the proper role of government in the economy. For starters, let’s hope that Congress can make the bailout something other than a blank government check for erstwhile free-marketeers like Paulson and Federal Reserve Bank Chairman Ben Bernanke. A backlash has already begun over the initial version of the bailout bill, which gives Paulson breathtaking authority and does nothing to address the causes of the crisis.

It already seems likely that the rescue package will include some kind of mortgage relief for homeowners facing foreclosure. That seems like basic common sense. But for now at least there is nothing on offer for the vast group of people who are neither so rich that none of this matters, nor so poor that they’re about to be on the street. .

Paulson and Bernanke are smart guys, and history suggests that dramatic government intervention is probably a good idea. So I’m not against the bail-out per se. But here are a few thoughts (mostly from people smarter than me) on how it could be made at least a little bit fair:

- Limits on executive compensation, and recapture of large fortunes that were, in hindsight, earned fraudulently.

There is already a clamor for the bailout bill to include limits on executive compensation and golden parachutes at companies that are getting help. Paulson and President Bush currently oppose this - it’s their friends after all! - but they’ll almost certainly have to cave on this issue. The patent absurdity of executives earning eight-figure sums while taxpayers foot the bill for their failed business strategies will just be too much (even if they do have employment contracts which guarantee them money unless they are fired “for cause,” with driving the company to bankruptcy not quite qualifying as “cause.")

But these provisions don’t go far enough. The government should also go after at least some of the money earned by people like Stan O’Neal, the former CEO of Merrill Lynch who was done the huge favor of being fired before the things hit the fan. He earned hundreds of millions of dollars during his tenure, much of it in bonuses tied to profits which later turned out to be illusory. If a CEO received bonuses for hitting earnings targets, but those earnings were based on accounting slight-of-hand or wishful thinking and had to be eliminated through later “restatements” and write-downs, the executives shouldn’t get to keep that money. Obviously. I wouldn’t necessarily argue for jail time, but there’s an argument to be made.

Limiting compensation and clawing back undeserved earnings is not just a fairness issue, either: only if those in charge suffer personal consequences when things go bad will their successors have an incentive to be more prudent.

- Government (i.e. taxpayer) ownership in companies in exchange for help.

The current proposal calls for the government to buy the bad assets (mainly bundles of mortgages that are worth just a fraction of their face value) held by a wide range of financial institutions. This is in effect a giant cash infusion for these institutions. And as any business-person knows, if you get a cash infusion when your company is on the brink, the entity providing that cash is going to expect a rather large pound of flesh in return. The Treasury should demand equity ownership in exchange for its money - not because it’s a good idea for the government to own these financial institutions, but to assure that taxpayers get fair value and a share in any future recovery. This seems pretty basic too.

- A crackdown on usurious practices by credit card companies.

Lost amid the clamor about mortgages is the fact that many people have relied increasingly on credit cards to stay afloat, and there is undoubtedly a ton of bad credit-card debt out there. Sadly, the credit card industry (which includes at its core many of the very same institutions that are getting government help) have responded to this by putting the screws to anyone who can still scrape together their payments.

When the Bush Administration pushed through legislation a couple of years ago that made it harder to get relief from credit card debt via bankruptcy, the industry claimed this was necessary to keep interest rates down for everyone. What a joke. Credit card interest rates are now routinely in the 25% range or even higher, at a time when core interest rates are quite low. Banks are paying depositors 2% interest, and turning around and loaning that money out to the cash-strapped middle class and small business owners at 25%. This is not only unreasonable on its face, it’s likely to exacerbate the economic downturn, both by crimping consumer spending and by inhibiting the day-to-day operations of many Main Street enterprises.

- Temporary tax relief for early 401K and IRA withdrawals.

For a lot of people, retirement accounts are a funding source of last resort. If you withdraw money from them before you turn 59 1/2, you pay taxes plus a 10% penalty. Temporarily suspending the penalty would provide relief for people who have some assets but are nontheless facing a day-to-day cash crisis.

I’m not an economist, and I’m sure there are more and better ideas on how to assure that the middle class, and Main Street, don’t get totally screwed in the rush to bail out Wall Street. With the Bush Administration using extreme doom-and-gloom scenarios to push the rescue package through Congress with as little scrutiny as possible, now is the time to demand that it benefit people other than those who created the problems in the first place.

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