Most of the debate in today’s financial crisis has been focused on the question “what should be done?” There has been little consensus, thus far. The reason is that we’ve failed to settle on what outcome we want from any potential action… or non-action. Do we (America) want to just stabilize the markets regardless of personal responsibility for firms? Do we want to allow firms who made bad bets suffer the consequences of their choices? Do we have a low threshold for economic pain, requiring a big bailout, or are we willing to take a recession and let the markets fix themselves? Do we want to take this opportunity to reset the “rules of the game” in a free market system? Do we want to cover investor, despite their mistakes, so that lending can continue in America? Do we want to protect Main Street so that people don’t lose their savings over $100,000 FDIC insured money? Underlying the debate over what to do is this lack of consensus on what the end game should be. Some ends are mutually exclusive; others can be combined and met together. In the end there can be debate over the economics of cutting capital gains taxes. There can be arguments over the economic ramifications for the future of bailing out firms and skewing their risk adjustment thinking. The issue of socialism creeping into American policy can be hashed out. But the end has to be determined first. There aren’t really two sides in the debate, but rather several different arguments, some of which are:
- Keep American people’s savings safe today vs. Some loss is acceptable for future stability
- Have a heart for those losing money because of corporate “greed” vs. Its not my fault and my tax dollars shouldn’t pay for it
- Free marketers who feel over regulation was the problem and regulation is the only way out vs. Free market principality
- Deregulation allowed subprime mortgages and MBS excesses to ruin us vs. Over-regulation such as mark-to-market accounting rules put us in this place
- The bailout is bad, but the alternative being a meltdown is worse vs. There will be no meltdown, we have alternative choices
- Wall Street needs the money to begin lending again to jump start the economy vs. Wall Street must suffer the consequences of their actions
- Capitalists should look for an outcome that includes elimination of harmful regulations (such as adjusting the mark-to-market rules to a three or five year), letting Wall Street investors who made big risks lose their shirts, businesses being able to cover their illiquid assets, a price benchmark set for mortgage-backed securities, and the return of investor confidence. Some of those outcomes are shared goals; others are not. But to meet these goals while retaining the capitalist principle that the government shouldn’t be bailout out firms with taxpayer money America would have to accept the possibility of a six-month to one-year recession. It is significant to note that historically, the economy moves up and down in cycles and this is a cleansing period for the financial markets. Yet, there are many Americans who are willing to accept this. And for them the capitalist response doesn’t meet their ends. This is what has to be worked out before a solution is reached. Although the bailout plan is on the ropes, it will probably be worked out in the end, to the chagrin of capitalists. Fingers-crossed that the successful stalls of the RSC will continue.