A conversation with a KFTC member/economist about the Wall Street Bailout

Peter Meyer, a KFTC member in Northern Kentucky who is also an economist, talked with us today about the context and impact and path of the Wall Street fiasco.  We wanted to know three things:  1) Why did this happen? 2) What are some good solutions? and 3) How would bailing out/not bailing out Wall Street executives impact Kentucky families?  The crux of his answers to these are below.  It's not a verbatim representation of the conversation--just as close as we can get right now.

KFTC hasn't taken an organizational stance on the Wall Street bailout, but we think it's important to have these conversations; talking about economic policy keeps us from being intimidated by it.   Many thanks to Peter for his time and insight in helping us have these conversations.  And feel free to add your own thoughts!

Q.  How did we get here?

A lot of things brought us here.  Most recently, $45 trillion dollars were traded back and forth in credit and mortgages, and nobody knows how much of this $45 trillion was backed up with real money, and how much was built on a problematic foundation that never had any real money.  People don’t know how much of that foundation is risky, and that's a very big problem.  Wall Street trades depend on credit, so when the credit industry got shaky, Wall Street got shaky.

The $45 trillion trading-on-thin-ice-and-sometimes-water was possible because of lax (or no) government oversight and too little regulation of the financial industry.  President Roosevelt enacted lots of great pieces of legislation to help regulate and oversee this sector, but they've been totally emasculated.  The Regan era did real damage to government's ability to regulate, followed up by the efforts of then-Senator Phil Gram (who was also, until recently, John McCain's chief financial advisor...the one who called us "a nation of whiners"), who succeeded in finishing off Roosevelt's work in 1999, under President Clinton. 

Why did traders continue to work with numbers that everyone knew weren't based in reality?  Because they made money that way!  When we deal with our family finances we try to think long-term, over the course of our lives.  What's going to keep me afloat when I'm 85?  The CEOs and senior executives at these places have much shorter horizons.  They get quarterly bonuses that can dwarf their paychecks, and those bonuses are based on numbers for trades that may or may not be on solid foundations.  Their horizon is so so short that they don’t think about the eventual bounce back for what they do to get their own bonuses.  The bonuses were designed to push the stock market up.  But when they push it down, there is no regulation. So what if the company goes under?  If they get fired, they still have their golden parachute!  We saw this happen when Enron tanked, and when the CEO of Hewlett-Packard left with her huge bonuses, even as the company was worth half what it was when she came on!  There are too many golden parachutes, too many bonuses, and too little oversight and regulation.  (If Congress really had the guts to fix this, they'd start taxing capital gains.  I don't think that'll happen, but it needs to.)

Q.  As an economist who is invested in principles of economic justice, what do you think good solutions should include?

The bill that got forward yesterday gave Paulson too much power, and did too little to help the people who were affected by the mortgage crisis.  That's why so many Democrats didn't vote for it.  Instead of fiddling around trying to fix the Paulson/Bush proposal, the Democrats should have crafted their own bill.  I hope that they're doing that now. 

Some of the money has to go to lenders to make them feel comfortable enough to keep trading in credit.  Businesses need credit to operate, cities need credit, we all need credit.  But not all the money.  A good solution would do three things:  1) If a company gets government  help, no bonuses or golden parachutes for their chief and senior executives.  2)  We need to cover the people who are losing the homes they're living in.  Give people a chance to pay their mortgages, a chance to avoid bankruptcy, and let's see how much of the problem that solves.  3)  I don't have a problem with the $700 billion number.  But put the money into something real!  Help people stay in their homes; invest in infrastructure, in building bridges and updating our internet connectivity and creating an infrastructure for renewable energy and efficiency, in investments that will last and create jobs!  I'm not against borrowing to strengthen the economy, but let’s do it to strengthen what makes us more productive.

Q: How does this Wall Street mess affect Kentucky families and communities?

The people who trade on Wall Street have to be able to use credit for their trades.  If the credit industry dries up, Wall Street stops.  If it gets bad enough, Wall Street isn't the only thing that stops.  Any place that would ever need to borrow--even short-term borrowing--is in trouble.  Lines of credit are likely to be taken away or reduced.  When credit gets frozen, people get laid off because their boss can't make payroll.  You can't get loans to go to college.  Your local government can't get a loan to rebuild the bridge, and your local school can't get computers, because they can't borrow the money for it.  And if our credit seems compromised in the eyes of the rest of the world, inflation goes up.

There's an old Chinese curse:  May you live in interesting times.  Unfortunately I think we do.  From here, we need to think of solutions that move toward fixing the real problems.