Let’s do a little critical analysis of Dean Baker’s sanguine column opposing the bailout, shall we? Baker starts out by telling us that there is no financial crisis.
I’ve heard lots of phony stories. Much of the country’s political and economic leadership has been running around raising the prospect of the Great Depression and a breakdown in the banking system (I actually had taken the latter seriously). These stories are absolutely not true.
There is no plausible scenario under which the no bailout scenario gives us a Great Depression. There is a more plausible scenario (but highly unlikely) that the bailout will give us a Great Depression.
Phew. That’s a relief, I guess I will call my congressperson and tell him ‘Hell, no, do not support the bailout package.’ Set aside for a moment the strawman argument that the we’re worried about a reprise of the Great Depression. Can’t we agree that we don’t want a Medium Depression, or even a Small Depression? Let’s focus on the part where Baker says that it is ‘absolutely not true’ that there is a prospect of a breakdown of the banking system. Does he really mean it? Well, no, not really.
There is no way that the failure to do a bailout will lead to more than a very brief failure of the financial system. We will not lose our modern system of payments.
You get that? The failure will be ‘very brief’. Why will it be very brief?
The basic argument for the bailout is that the banks are filled with so much bad debt that the banks can’t trust each other to repay loans. This creates a situation in which the system of payments breaks down. That would mean that we cannot use our ATMs or credit cards or cash checks.
That is a very frightening scenario, but this is not where things end. The Federal Reserve Board would surely step in and take over the major money center banks so that the system of payments would begin functioning again.
First of all, the main concern is not so much that people won’t be able to use ATM’s or credit cards or cash checks. Yes, if the people make a run on the banks, they will become insolvent and unable to honor your deposits. But the intervention is aimed at freeing up short-term lending of the type used by businesses to meet payroll, pay utilities, and make investments in raw materials to meet new purchase orders. Without that short-term credit, small businesses will simply go out of business as they will not be able to do business. And, once that starts to happen, there will be a domino effect. But let’s be clear what Baker is arguing. He’s saying that it’s okay for every major bank in the country to fail because the Fed will just step in and take over the banks. Think I’m kidding?
In other words, the worst case scenario is that we have an extremely scary day in which the markets freeze for a few hours. Then the Fed steps in and takes over the major banks.
See? No problem. I mean, what’s there to worry about?
The system of payments continues to operate exactly as before, but the bank executives are out of their jobs and the bank shareholders have likely lost most of their money.
Everyone with a 401(k) is a shareholder, but as long as those nasty bank executives are unemployed, everything will be fine. Baker is actually making a recommendation that the Federal Government take over the entire banking sector of this country and selling it as no big deal. That’s just dishonest. Anyone that undersells the risk of this scenario to such a degree cannot be trusted on other details.
The best analogy I can think of for this kind of sanguine attitude is the Neo-Conservatives’ Theory of Creative Destruction:
Creative destruction is our middle name, both within our own society and abroad. We tear down the old order every day, from business to science, literature, art, architecture, and cinema to politics and the law. Our enemies have always hated this whirlwind of energy and creativity, which menaces their traditions (whatever they may be) and shames them for their inability to keep pace. Seeing America undo traditional societies, they fear us, for they do not wish to be undone. They cannot feel secure so long as we are there, for our very existence—our existence, not our politics—threatens their legitimacy. They must attack us in order to survive, just as we must destroy them to advance our historic mission.
In short, certain elements on the radical left are looking at the current crisis as an opportunity to ‘tear down the old order’, with little to no regard for the tumult that would ensue. Sure, it’s easy to demagogue this bailout. And it’s tempting. There are a lot of greedheads that deserve to get their comeuppance. If you want a revolution, you might be on board for a little creative destruction. If, however, you want to avoid losing your job and your retirement, you might want to listen to more prudent advice.
