The Cure Is Not Worse Than The Disease
By Marc Adler
In God is not Great, Christopher Hitchens makes his case for anti-theism by, among many other things, arguing that religion poses a serious threat to public health. In particular, he points to religion’s recurring tendency to pronounce medicine more dangerous than disease. For example, Muslim extremists in Nigeria ruled years ago that a vaccine to inoculate people from polio was a plot by the United States and United Nations to poison Islamists, undermining efforts to abolish the hideous illness. Similarly, millions have died in poor countries because many Church figures preach that condoms transmit AIDS through secret microscopic holes.
A comparably dangerous dogma plagues our population. It holds that TARP is worse than the sub-prime mortgage crisis. An overwhelming majority of Americans consider TARP an outrageous, ineffective waste, and conservative die-hards, specifically Tea Party activists, hysterically decry the Fed’s intervention as if it were a great tragedy. At rallies, on Internet forums, and in speeches, such as Michelle Bachmann’s response to the State of the Union, free market fundamentalists take issue not with the near collapse of the global economy, but with the mechanism by which our government prevented apocalyptic disaster. They absolutely refuse to acknowledge the legitimacy of “too big to fail.” They protest that government should rather “get out of the way” and let the market sort itself out. And they point to TARP’s alleged price—$700 billion by Bachmann’s account. In truth, TARP, for all its bad press, is one of the most important, impressive and effective instances of government intervention in history.
As the Financial Crisis Inquiry Commission records, Chairman Bernanke called the subprime mortgage meltdown “the worst financial crisis in global history, including the Great Depression” while urging Congress to act in 2008. For all their character assassination attempts, conservatives cannot hide the fact that Bernanke is a Republican, appointed by Bush, who staunchly supported Alan Greenspan’s Ayn Rand-inspired brand of laissez-faire economics for much of his career. In addition, he is a Great Depression scholar, composing many essays on the subject as a graduate student at MIT. His assessment of the situation, therefore, is supremely authoritative. This was indeed, “the big one.”
Most people do not realize how close we came to the brink of financial apocalypse. Bernanke’s conclusion that 2008 was 1929 on crack accounts for the fact that this time around we were the world’s sole superpower, with a banking industry reliant on ill comprehended “technologically advanced” trading mechanisms such as CDO’s and CDS’s and an unprecedented concentration of wealth—as the authors of 13 Bankers explain, roughly 60% of America’s GDP belongs to a dozen or so mega-banks—in other words, too many institutions were tied into the vast web of worthless sub-prime mortgage transactions. And when the housing bubble burst, almost all the major players were exposed, nearly dooming the rest of the global financial system. This is what “too big to fail” means: most people consider Lehman’s collapse the climax of the crisis; thousands lost their jobs, the stock market crashed, bank-runs shuttered much of the “shadow banking” industry, and public confidence was crushed. Imagine what would have happened if the government had allowed every firm to fail. There would have been a run on every bank, and ATM’s would have broken down. We’d be pining for a 10 percent unemployment rate.
It is at once the height of irony and not at all surprising that conservatives refuse to acknowledge the reality of too big to fail. They are, after all, the ones who created the conditions for banks to attain that size and power. Under the New Deal capitalism model between FDR and Reagan, the Glass-Steagall Act limited the scope of commercial banks by prohibiting them from merging with investment banks and joining the shadow banking system and forbidding them to undertake risky transactions in return for a federal guarantee against bank runs. The idea was to ensure that our banking system, the life-blood of industry and innovation, does not become too big or reckless. The Reagan revolution changed all that. By dismantling regulation and discarding the Glass-Steagall Act (which Clinton formally repealed) free market fundamentalists enabled Wall Street to do as it pleases. Consequently a couple of banks now control more than half of the nation’s GDP.
Nevertheless, conservatives vehemently denounce the heresy that our economy could not survive if institutions like AIG were to go under. The government should have gotten “out of the way” and let the market run its course rather than commit the socialist sin of intervening. It’s not enough that their ideology caused the crisis; we must also rely on it to save us. This is not unlike the Muslim extremists’ fatwa about the polio vaccine and the Church’s attitude towards condoms, in that the cure is worse than the disease. To denounce the dogma and maintain a different policy would be to concede that their world-view is wrong—that the West is not always evil in the first case and that god’s design can be improved upon in the latter. The conservative reaction to too big to fail mirrors these religious rulings: rather than admit that unfettered capitalism narrowly concentrates wealth in the hands of the powerful they convince themselves that “no company is too big to fail,” and that, as a Republican I know said in early 2009, “if not for TARP the economy would have completely recovered by now.”
But, as Adam Smith, the originator of the “invisible hand” metaphor, observed in the Wealth of Nations, “wherever there is great property, there is great inequality.” And this fact became all too clear when Lehman collapsed, prompting a Republican president, treasury secretary, Federal Reserve Chairman and many conservative congressmen to bail out Wall Street in an acknowledgment that if the biggest firms fail the entire economy would follow. It was Bernanke who led the charge in the face of endless, bitter criticism, and considering that TARP saved us from a fate worse than the Great Depression and turned a profit, his acts were heroic. Yes, you heard right. As Treasury Secretary Timothy Geithner has testified before Congress and as the non-partisan Congressional Budget Office recently reported [pdf], TARP has garnered a net gain, and when including the AIG bailout, the auto industry and mortgage restructuring, the cost will be an estimated $25 billion, no more than a third of the loss incurred during the comparatively small savings and loans bailout in the 1990’s, and a far cry from Michelle Bachmann’s $700 billion figure.
Understandably, TARP has angered almost everybody for one reason or another. Those who’ve faced foreclosure and watched Wall Street executives continue to earn record profits should be incensed. But that rage should not be directed at the bailouts. As Bernanke cautioned all along, we needed to put out the fire before focusing on preventing future crises. We should reserve our ire for financial reform, which, among many shortcomings, does not reinstate Glass-Steagall and therefore will not eradicate the too big to fail phenomenon (though it at least features a strategic way to monitor systemic risk and a neat mechanism to wind down dangerous institutions).
However, many critics such as Paul Krugman and John Cassidy have convincingly argued that the only real chance the government ever had to end too big to fail was when the bankers beseeched Washington to bail them out—in those days they had no lobbying leverage, and the government should have temporarily nationalized at least some firms, wiping out those who hijacked the economy, deterring moral hazard and reshaping the system right then and there. But once Wall Street was enabled to revert to its old ways they predictably pumped vast sums of money into watering down reform. This debate is welcome since it is borne out by the facts. But the conservative dogma that we would have been better off without TARP is as erroneous and dangerous as the Republican response to the Financial Crisis Inquiry Commission, which perversely blames the crisis on Fannie Mae and Freddie Mac and the Community Reinvestment Act.
Editor’s note – News Junkie Post is proud to welcome Marc Adler to our site. Marc also writes for SpliceToday, has been a featured author at Alternet, and his home blog can be found at The Bloody Crossroads.