Wall Street "Bailout"

Much has been said about the potential government bailout of Wall Street investment companies who made bad decisions on purchasing mortgage securities. It has been called the worst financial crisis since the Great Depression. I'm not an economist, but I have looked at what has been going on, and I have a few comments I would like to make. Let me be clear: I support the government's efforts to apply a short-term band-aid to the banking industry and keep it from failing if adequate safeguards are put into place on issues like executive compensation and oversight. Not to do this could potentially lead to disastrous financial consequences that affect not just rich investors, but everyone who has a retirement plan.

First of all, the root causes of this crisis are obvious, and there is no need for John McCain's "9/11 Commission"-type investigation. The Bush administration and Republican-led Congress loosened the rules for mortgage lenders and other types of investments, which made it easier for more people to qualify for mortgages, regardless of their ability to pay them back. This artificially inflated the value of homes, creating a "bubble" effect. It took a few years, but the market finally slowed down when people realized that they could no longer pay their mortgages. In many cases, these people got their mortgages based on bad information. they assumed (with some reason) that home values would continue to rise at a consistent rate. In other cases, the mortgage companies engaged in fraudulent practices like increasing the stated income of an applicant so that he/she could qualify for a larger loan. They began the practice of interest-only loans, no-money-down home purchases, and other risky type loans that would eventually come back to haunt people when the amount due suddenly increased to the point where they could no longer afford it. Now the banks that made those loans are looking for a handout from the government.

But the problem does not stop there. Those mortgages were "bundled" and sold as investments to other firms, many of which take care of retirement funds. Now that many people are no longer able to pay the loans back, the banks have significantly reduced operating capital, which is leading to a "credit freeze." While I am as opposed to excessive credit as the next guy (still paying for school), I have to say that the credit markets are what make business, and therefore growth, possible. Some of Wall Street's largest firms have already collapsed, beginning with Freddie Mac and Fannie Mae, giant mortgage lenders, Lehman Brothers, one of the oldest investment banks in America, and AIG, an insurance giant (thank goodness I didn't hand them my retirement last month). Washington Mutual, a bank, failed as well in the largest bank failure we've ever seen.

Scary things are happening, so what do we do? In the Great Depression, there were two approaches, that of Herbert Hoover, a fiscal conservative, and Franklin Delano Roosevelt, who was more of Keynesian. Hoover, by allowing the markets to "correct themselves," actually triggered an even worse fall than would have occurred had some safeguards been in place to shore up troubled banks and investment groups. Roosevelt undertook a massive restructuring of the economy, in which government took a role in insuring bank deposits and other measures to promote confidence in the markets. While the country did not truly come out of the Depression until World War II led to a massive increase in productivity, the reforms created by Roosevelt (as much as I hate to admit it) have kept our country from having any total meltdowns on the same scale. In case you did not know, financial meltdowns were common before increased regulation, with at least two major Panics (Depressions) in the 1800s. While we have faced numerous "recessions" since 1940, none have come close to the problems of the 1930s or the 1800s.

The Reagan years  and the Bush years have been times of de-regulation of the markets, with troubling consequences. First came the Savings and Loan scandals during the late 1980s, in which John McCain played a prominent part as a member of the Keating Five, a group of Senators who received money from a Savings and Loan owner. They tried to keep federal regulators from investigating Keating and were ultimately reprimanded by the Senate Ethics Committee. Next came the Bush years, during which John McCain was a champion of the de-regulation efforts that led directly to this crisis.

Allowing the market to correct itself is a good idea in theory, but the problem in this is that the federal government was complicit in the de-regulation of these industries and therefore at least somewhat culpable for the fact that many peoples' retirements are at risk. Sweden went through a similar crisis in the early 1990s and used a similar plan to help reform the banking system. They made their money back relatively quickly. I think our country should do the same.

So where do we go from here? I'm not one of those who thinks that any plan is a good plan. I think there needs to be a prudent injection of capital into the credit markets to keep things going. Having looked at the draft bill that was rejected yesterday, I was struck by the fact that they had taken the initial administration proposal and added significant modifications to it, including the creation of an oversight board, limitations on executive compensation, and a decision to dole the money out slowly, rather than all at once. It's not a perfect plan, but it is a good plan, and it is a necessary plan. I am appalled that the "maverick," John McCain, decided to insert himself into the negotiations for political gain, apparently derailing an agreement in principle. The bailout plan is necessary to protect the life savings of working Americans, and provisions were put in place to limit the abuse of funds in granting "golden parachutes."

I don't know what will happen, but I hope a resolution is reached soon.