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Treasury Secretary Henry Paulson, Fed Chairman Ben Bernanke, Securities and Exchange Commission Chairman Chris Cox and James Lockhart, III Director of the Federal Housing Finance Agency, testify in Washington Sept. 23 before the Senate Banking Committee.

Economic bailout: Socialism to the rescue?

By: Sam Chenkin

Posted: 9/26/08

The Federal Reserve announced Sept. 16 the bailout of insurance giant AIG. The rescue - in the form of a loan - is an act unprecedented in the history of the Federal Reserve. The government now, in effect, possesses a controlling interest in a gigantic private organization. This makes AIG, in a very real sense, a public entity.
Now, only days after this staggering announcement, the government has announced a plan to bailout not only AIG, but any company sitting on bad debt. The plan - with a sticker price of $700 billion, but potential for the loss of far, far more - would give the Treasury broad powers to purchase bad debt, taking it off the hands of beleaguered banks and giving them a second chance at life.
While the bailout may be a relief for consumers, the reaction it was met with on Wall Street is far more interesting. Wall Street applauded, stocks soared, and lobbyist groups have been actively trying to extend the powers given to the Treasury under the plan. The rabid capitalists we all know and love embraced a move that reeks of socialism. This, after decades of lobbying for a "free hand" and complaining about too much regulation.
The bailout may not be so surprising if considered in the light of our last economic disaster. Certainly not since the Great Depression has our economy looked so grim. That crisis too was brought on by a lack of regulation, among other factors. Banks failed, industries collapsed, and people starved in the streets.
The New Deal marked (though perhaps did not single-handedly bring about) the end of that sad period of our nation's history. Regulation was heaped upon more regulation, and a dizzying array of acronyms was unleashed upon poverty and unemployment. This was the closest the nation has come to socialism, helping us recover and promising to prevent such an event from ever returning.
Of course, between then and now, lobbyists and politicians have slowly eroded the protections that brought us back to economic stability. In times of plenty, Wall Street has pursued profits at the exclusion of all else, tearing down legislation where it got in the way. I hope it comes as no surprise that the hens have come home to roost. Quarter loss after quarter loss, crisis after crisis, failure after failure, the financial industry is stuck in a downward spiral.
But all is not lost - do not fear - the federal government is here!
Caught between a desire to let shareholders bear the brunt of their own folly and a need to protect the American people, the feds have made hard choices. Caution is winning out, and financial giants have not been allowed to fail thus far. U.S. Treasury Secretary Henry Paulson himself said it was tremendously painful "to have the American taxpayer put in this position, but it is better than the alternative."
This latest bailout could signal a return of New Deal ideology, or at least a burnt-out wreck of its former glory. Unlike last time, the government's involvement is limited to buying back bad debt and is unlikely to gain new powers to push capital directly to consumers. President Bush is pushing for sweeping changes to the way the federal government functions. Directly influencing the market in this way is uncharted territory, and his plan calls for little or no oversight.
The potential pitfalls are huge. The government would be able to amass far more than $700 billion in outstanding bills by purchasing debt high and selling it low. The powers the government would gain have the potential to add trillions to the national debt. Efforts by Congressional Democrats to add oversight and the power to directly mitigate the foreclosure crisis have met stumbling blocks, but perhaps they will succeed.
If they do, perhaps Democrats can find their feet amongst the rubble of Wall Street. Perhaps the balance of political power is shifting. This is evidence for the cyclical nature of American politics, which now, finally, seems to be turning full circle. The age of unbridled capitalism may be coming to an end - brought on not by love or violent revolution but by the implosion of the financial system.
Surprisingly, the capitalist swine do not seem particularly unhappy by this change. Despite their long-winded speeches about the power of the market to self regulate, they seem unwilling to let it do so. A free market is great when the potential for profits is high, but when business is suffering, it's suddenly time for the government to "do its job."
But of course, the sinking firms whisper, the government can't be allowed to do its job too well. It must act immediately to fix a problem created by a lack of regulation; controls and accountability, they say, can wait.
Thus, this recent cry for socialism is likely nothing more than capitalism in new guise - an attempt to shift debt to a new player in order to return to greater and greater profits.
The U.S. must not sink back into the complacent, terrified state it resided in after Sept. 11, 2001. Our Congress must remain strong, our investors steady. The current proposed law contains far too little oversight. We must not allow firms a free ticket out of debt, only so they can bring our economy down again. And we must be ever vigilant to the ploys and wiles of capitalism.

Sam Chenkin is a pre-junior majoring in information systems. He can be reached at op-ed@thetriangle.org.