Why did it fail?
It didn’t fail because Nancy Pelosi gave a mean speech attacking the Bush Administration.
It didn’t fail because Republicans are disloyal to their President or suffer from irrational fears of creeping socialism.
It didn’t fail because Congress and its members refused to take the situation seriously.
It failed because the basic idea of the government deficit-spending another seven hundred billion dollars to save a bunch of banks who all seem to buy each other out anyway is, shall we say, a hard sell to the American public. It failed because many Americans simply don’t understand why a small number of mortgages failing because banks made bad loans isn’t something that the market can take care of on its own.
How the market taking care of things on its own, of course, is what our leaders are trying to save us from. The market taking care of things on its own results in things like homes losing a quarter to half of their value in a two-year period. The market taking care of things on its own results in nearly 800-point daily drops in the stock market and peoples’ retirement accounts being eviscerated. The market taking care of things on its own results in more profits from American commerce being gobbled up by foreign banks and businesses and not reinvested here — exporting our wealth.
The reason for that is that everything in our economy is leveraged. Everything depends on the margin. How much money can a bank lend on the strength of its deposits? That the margin at which wealth is generated. Everything depends on cash flow — on debtors making regular installment payments on their debts and creditors not withdrawing their assets too quickly. And when the market loses confidence in the assets of the institutions that generate wealth by creating debt, they lose confidence in the institutions themselves. The tissue of shared faith in the power of money as a symbol of wealth eventually reaches a breaking point.
And it may seem like these things just happen, massively, all of a sudden. It seems that way. But that’s not really how it works. Read a book called The Tipping Point by Malcolm Gladwell and you’ll get an idea of why — the change is really creeping up all along, it’s the resistance to the change that suddenly vanishes. When the realization that a change is upon us occurs, the perception of the change spreads quickly and it seems like there has been a sudden change in fashion, mood, or so on. Freeze some water in a pot. Then apply intense heat to the pot’s bottom. The time between when the ice finally disappears and when the water boils into vapor will be much shorter than the time that it looks like the ice is just sitting there, not melting yet.
That’s what’s going on here. We all sort of knew that things were not right, that the real estate cycle seemed unusually intense. But the subtextual suspicion that the financial network underlying our economy was actually eroding rather than just cycling was there all along. And finally, something happened — two banks got withdrawal runs that they could not handle (because no bank can handle a sustained withdrawal run) and failed and got bought out or taken over. And then another one did. And then it it Fannie Mae and Freddie Mac. That was the tipping point.
So what’s to do?
My instinct is to do nothing. The market will sort itself out. Real estate will eventually come back. But nothing is what we did under similar circumstances in 1929, and nothing turns out to be a rather poor option. The stock market suffering a sudden decline was one thing — the problem was people pulling their money out of the banks and rendering anemic the financial institutions that could have re-generated wealth in the wake of the crash. Today, what is needed is restored confidence in financial institutions. People need to stop withdrawing their money and, ironically, they need to continue borrowing it to generate debt, which in turn generates wealth.
A lawyer I worked for a partner who said that one day, there would only be two or three banks. At the time — the mid-90’s, banks were in the habit of buying one another aggressively (all on leverage from other banks) and he figured that Bank of America and Wells Fargo would eventually merge and become the Bank of the West, that Chase and Bank of New York would merge and become the Bank of the East, and MBNA would grow to become the Bank of the South. Maybe something like that needs to happen. Maybe we need to have fewer small, localized banks and a lot of big banks with very conservative approaches to their loans.
You can impose the latter by regulation. But it’s better to encourage it because you want some degree of risk — that’s where innovation and profit come from, along with the inevitable failures. So maybe we bundle and securitize all manner of bank loans through regulated consolidators and spread the risk around like that.
So much for policy. Politics are another matter. No one likes to consider the murky, unsatisfying truth that banks lending money is how money is made. So someone very clever needs to figure out how to sell something like this plan to Main Street. Someone like, say, a Presidential candidate, who can say that he had been studying the bill for a long time and that he thinks he has the answer. He can propose an amendment that moves a lot of money around, take the reins of the issue out of the hands of the White House and shows himself to be a leader. It doesn’t have to actually change much of anything — the big deal is to get the money into the institutions so that consumers have confidence in them.
The candidate who can pull that off would gain substantially in the polls — if the stock market does not immediately react to the newly-labeled plan by dropping a thousand more points. It would take a candidate with a little bit of nerve and a little bit of vision. It would take a candidate willing to take that gamble. If that candidate were behind in the polls, that would make things competitive again and steal the centerpiece issue from the front-runner. If that candidate were leading in the polls, it could put the Presidential race so far out of the other guy’s reach that all further campaigning could be spent, say, building a filibuster-proof majority in the Senate and a Congress stocked with freshmen legislators who all owed their jobs to the new President and his powerful coattails.
I wonder if we have any politicians like that. The evidence would suggest not.