In search of a "New Deal"

Earlier this week the House of Representatives rejected a bailout plan for Wall Street and its malfeasance in the mortgage crisis that now threatens to send our economy into an abysmal dive.

The effort behind Treasury Secretary Henry Paulson’s Troubled Asset Rescue Plan was to buy from banks and investment companies the mortgage-backed securities whose values have plummeted and can no longer be sold on the open market.

The idea was to free up these banking institutions to extend credit – to the American taxpayer, corporations, as well as other banks – and avoid a credit crunch that would certainly freeze up the market and take us to a place “somewhat” reminiscent of the early 1930s.

In the 1930s, the period known as the Great Depression, the economy took a drastic downturn spurned by the weaknesses and imbalances within the 1920s U.S. economy. Franklin Roosevelt, elected in 1932, sought a “New Deal” with the American public in an effort to turn America’s misfortune around. Government action, whether in the form of taxation, industrial regulation, public works, social insurance, social-welfare services or deficit spending, came to assume a principal role in bringing economic stability back to America.

Roosevelt introduced a number of major changes in the structure of the American economy, using increased government regulation and massive public-works projects to promote economic recovery. His New Deal was fashioned, in large part, on the economic principles of John Maynard Keynes.

The Keynesian theory of economics suggests that government regulation and deficit spending in stimulating the economy will ensure a long-term, stable economy. This is in stark contrast to the Milton Friedman approach to economics, which suggests that if you leave the market to govern itself, it will work in the best interest of the economy. That is the mantra of early 21st century republican economics. That is, in great part, why we find ourselves where we are today.

Although I somewhat agree with giving the market breathing room, this approach would have to be predicated on the assumption that market management would be free of selfish greed, corruption, irresponsibility and mismanagement. No Enron, no Worldcom, no bailout of Wall Street.

Roosevelt got the economy on the road to recovery by imposing government regulation and investing (deficit spending) in infrastructure. Certainly there was more room for expansive government than now, but the lesson from history could and perhaps should be applied to our present economic status. It should be noted, for argument’s sake, that the rebirth of the economy after the 1930s, and Roosevelt’s New Deal, got a healthy boost by the industrial spark of World War II.

Today, we are being told that if we do not approve a bailout plan that will cost the taxpayers $700 billion, we will most certainly face something likened to the Great Depression. And we have to move now. Though I agree that it is necessary to free the banks to extend credit to free up their liquidity, I am not sure this is the best deal for the American people.

What are missing from this latest proposal are provisions to stimulate the economy. That should be the key lesson learned from Roosevelt’s New Deal. What is missing from this deal is the restructuring of many of these awful, sub-prime mortgages that need to be refinanced at market value, at 20-30 year rates that homeowners can afford. THAT is how you get money back into the economy, and subsequently back into the banks. That is a benefit to the taxpayer. In its current form, this deal seeks only to bail out the fat cats on Wall Street with no definable payout to the taxpayer.

So which presidential candidate benefits from the latest deal falling through? Not sure.
John McCain made a risky move by suspending his campaign to go back to Washington and “fix” the problem. Ultimately, he may have kept this bad deal from going through by injecting presidential politics into the sensitive negotiations. Barack Obama was correct in his initial reaction to remain distant from the proceedings unless called for. However, the spotlight – and the rush – of the campaign with five weeks left, may have caused this deal to fall through which, I believe, was in the best interest of the American public. Passing a bill of this magnitude deserves more pragmatism from our elected representatives and it has to center on reinvigorating the economy. That means putting money back into the hands of the American people. I don’t believe we will fall into the Great Depression II tomorrow. As the Senate has just passed a revision that still falls short accomplishing the right mission, the bill now finds itself yet again in the House. Our representatives need to take their time and strike the right deal – A New Deal.