If you're hungry, you have to eat. But you don't have to eat the absolute first thing you see. If the first thing you see is a piece of moldy meat lying on the sidewalk, you'd better walk on and find something else.
Our economic situation is similar. Years of bad decisions by Republicans and corporatists have given us some big problems to fix. We're hungry! But that's not a reason to grab the first fix that comes along and spend, possibly, most of what we have left on it. Especially if that fix is from the Bush administration!
Stay away from the moldy meat!
Lots of people are talking about how we're facing a major crisis. But I can't find one reputable economist who says that we have to have a response ready by tomorrow or even next week. We have time to do it right. And virtually nobody thinks Paulson's plan was right. Even tepid supporters like Krugman thought we could do much better. And here's Nobel prizewinning economist Joseph Stiglitz:
its basic approach remained critically flawed. First, it relied – once again – on trickle-down economics: somehow, throwing enough money at Wall Street would trickle down to Main Street, helping ordinary workers and homeowners. Trickle-down economics almost never works, and it is no more likely to work this time.
Moreover, the plan assumed that the fundamental problem was one of confidence. That is no doubt part of the problem; but the underlying problem is that financial markets made some very bad loans. There was a housing bubble, and loans were made on the basis of inflated prices.
We need a bailout that works. A bailout that fails - like Paulson's would have (since when does any Bush administration scheme work?) - leaves us worse off - still in a crisis, but much poorer. What we really need is:
Emergency restoration of Glass-Steagal We cannot have the entire world financial system at the mercy of a small trading desk! (That's what actually happened with AIG). Glass-Steagal protected the key workings of the financial system from speculation at financial companies.
Providing federal credit to the real economy The Fed is loaning truly vast sums to the banks. Commercial paper issuance is at an all-time high. But it's not getting through to the real economy. The Fed either needs to start acting like a national bank and making loans directly, or at least tailor its lending schemes so that money reaches the people who need it.
Fix the mortgages That's doesn't say "give hundreds of billions to those who wrote the bad mortgages". We need to step in and buy up these bad mortgages - at suitable discounts - and, where possible, rework them to keep people in their homes and prevent wasteful and unneeded foreclosures. This plan has a lot of support, both from economists like Roubini and politicians like Hillary Clinton. We should listen to them, not to Bush lackeys.
Do I even need to mention that all three of these ideas were parts of the New Deal that have been cut back or eliminated since Reagan? (Technically Roosevelt didn't use the Fed to provide direct credit, he used other methods like the Farm Credit Act. But the effect is the same.)
We have time and ability to find a plan to make the economy healthier. Let's leave Paulson's moldy meat on the sidewalk and go get it.