By Adam | Anyone want to try to guess the author of the following quote?
- [The] state considers that private enterprise in the sphere of production is the most effective and useful instrument in the interest of the nation. In view of the fact that private organisation of production is a function of national concern, the organiser of the enterprise is responsible to the state for the direction given to production.
- State intervention in economic production arises only when private initiative is lacking or insufficient, or when the political interests of the state are involved. This intervention may take the form of control, assistance or direct management.
I'll give the answer to our mytery quote after the jump. But let's take a minute here and take in the sheer magnitude of the federal government's bailouts of Bear Stearns, Fannie May, Freddie Mac, and now AIG.
The Bear Stearns bailout could cost the federal government $30 billion, and that cash infusion was reflected in a nice bump to the stock value of Bear Stearns purchaser JP Morgan. The government put up 85 billion dollars to shore up AIG. We know this is a bad bet because if it had been a good bet, private investors would have taken it and the federal government would have stayed out. The same goes for Fannie and Freddy, where the government is already on the hook for a$200 billion bailout, and if the market really collapses they could end up with a trillion+ dollar millstone which would drag down the entire economy for years to come.
The magnitude of these bailouts really can't be overstated. Our economy is at risk in a way that has never happened in my lifetime.
Our mystery quote belongs to none other than Benito Mussolini, from "Fascism: Doctrine and Institutions". And yes, I feel that current administration policies have a lot more in common with classic Fascist policies than they do with the neoliberal economic philosophies that the administration claims to adhere to. Fascism can be defined (among many possible definitions) as the union of corporate and civil control into one organization. Given the corporate influence on this administration (the treasury secretary is the former Goldman-Sachs CEO, for goodness sake) and the government bailout of large corporate entities, doesn't that seem like a decent working definition of administration policy?
Basically, three factors led to the deadly cocktail we see today:
- After the deregulation of the financial markets in the late 90's (led by McCain's chief economic adviser, Phil Gramm), financial markets gradually became more and more interconnected, so that a problem in one area became more likely to spill into another. Deb has summarized the issues here.
- Increasingly complicated financial instruments were used to package and sell off debt from one buyer to another, making it more difficult to recognize the risk inherent in these loans, and spreading the risk from one financial sector to another.
- The housing bubble, fueled by low interest rates and other irresponsible fiscal policies, created a trigger to send the whole rickety financial structure crashing down.
When the financial crisis started, these institutions immediately came to the government looking for handouts. Lobbyists sprayed cash everywhere in the hopes of getting much, much more cash sprayed back at Wall Street. And by and large, they've gotten what they wanted. What we are seeing here is the logical extension of the "moral hazard" problem. If investors do well, they make money, and if they do poorly with their risky choices, then the government bails them out. Sure, some investors take a bath, but the government will shield the markets from the worst of it.
At least in the case of AIG the government let the stock tank before they intervened. With Fannie and Freddie the government is acting to protect the investments of those who bet on Fannie and Freddie. Which means that in a very real sense, the US government is borrowing money from China in order to shore up the price of stock held by China. It's beyond insane.
When the smoke clears on this crisis, we're going to be hundreds of billions, if not trillions of dollars deeper in debt - and unless the markets are regulated, it won't have done any good. If you're going to pay lip service to the Chicago school of economics, then you have to let the markets tank and steer clear of this. If you're going to intervene to soften the blow of a financial collapse, though, then you can't preach deregulation the rest of the time.