Substituting for the vacationing Ed Schultz on MSNBC today, Cenk Uygur delivered a pretty good narrative on the Democrats mistakes in bailing out Wall Street, but not Main Street. He let people know about the shift in wealth distribution over the past 3 decades, and he was very direct and forthright in telling us about the Democrats’ sell-outs to business over the past year and a half. Cenk’s directness and plain-spoken style is very effective in this kind of show, and he has been a very good fit to its format during Ed’s absence.
Of course, Cenk’s narrative did assume that the Democrats had made mistakes in the way they dealt with the Republicans, the Banks, Wall Street, and the Pharmaceutical and Health Insurance Companies. He either doesn’t think their actions are “a feature, not a bug,” or will not say so, because he’s trying to be politic. So, assuming that they have made mistakes he then offers advice about how they ought to admit to mistakes, and make bold statements about how they’re going to pump up small business with Government bucks, and if the Republicans try to stop them, then they, the Democrats “will be coming for them.”
After his statement, Cenk connects up Senator Sherrod Brown (D-Ohio), one of the more progressive Democratic Senators, and asks him to comment on Cenk’s account of what’s happened and on what the Dems should do now. And then he and brown talk for awhile about how the Democrats are going to get something done for small business when they get back in September and make some jobs for people.
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What they don’t talk about is whether the Democrats can get a small business stimulus bill through the Congress without getting rid of the filibuster, or whether if they do get one through it will be deficit spending, or deficit neutral. These are pretty important questions. The first is important because if they can’t get rid of the filibuster, they probably won’t be able to pass anything. And even if they can they probably won’t be able to do it using deficit spending. Also, if they can’t pass it as a deficit measure, then they’ll probably have to get that money from some other Government spending program, since the Republicans won’t sit still for a tax increase. And, of course, if it’s taken from another Government program, then the decrease in aggregate demand cause by cutting that program will tend to undermine the increase in aggregate in demand from the small business stimulus, so that the net jobs gain will be small, if there is any at all.
Finally, Cenk and Sherrod come down to the end of the exchange and Sherrod says that Congress and the Democrats didn’t make a mistake in bailing out the banks and the auto companies, but that their mistake was in moving so fast legislatively that they trusted the major banks to do the right thing, and neglected to pass measures requiring them to lend out money to businesses, and cenk ends up agreeing with him as their conversation ended.
It’s on this last point that I have my most serious disagreement with them. In my view, bailing out the banks was a big, big mistake. I think the Government should have seen to it that the banks had to recognize their toxic assets, which would have rendered most of the major banks insolvent. Then the Government should have taken them into resolution. Had these things been done the Government could have cleaned up the toxic assets, seen to to it that the banks lent to businesses again, eliminated the trading departments of the banks and gotten them out of that business, and then spun the banks off to private capital after about a year or so. Then the banks good behavior wouldn’t have been left to chance, and their ability to create bubbles by gambling with other people’s money would have come to an end at least for a time.
Just as importantly, had the Administration followed this course of action, it would have deprived Wall Street of much of its political power during the critical first year of this Administration. There would have been no campaign funds flowing from the banks to the Republicans for a year. There would have been much weaker political campaigns against credit card reform and the FinReg bill, and also far weaker campaigns against the economic stimulus bill, and health care reform when the President got to it. So, in my view, the Administration, assuming it really wanted to succeed, acted stupidly both with respect to its financial policies and also politically. It failed to take advantage of opportunities to enforce the flow of funds to small business, break the banks up into smaller healthier banks, dedicated to lending rather than gambling, and eliminate the banks’ political power for a critical period when major reforms that would normally be opposed by the banks were going to be legislated. In turn, this political mistake led to inadequate legislative actions on the stimulus bill, Finreg, credit card reform, and health care reform.
In short, bailing out the banks was not the right policy. It was the core mistake that led to all the others and that more than anything else accounts for Obama and the Democrats’ FAIL. I will not, at this point, speculate much on whether this failure is a bug, or a feature. Congress and the Administration are not monolithic bodies, so my personal belief is that for some in these institutions, proceeding this way was a bad mistake. But for others, it was a feature. I’ll leave it to my readers to decide who participated in a mistake and who acted in the way they did knowing very well what the outcome was likely to be.
(Cross-posted at FireDogLake and Fiscal Sustainability).