Rescuing the American Economy: Now What?
Michael Ettlinger
What happened?
After trying stop-gap measures to deal with the financial crisis over months, the Bush administration, Secretary of the Treasury Paulson, finally came up with a more comprehensive proposal, which was pretty much dead on arrival on Capitol Hill because it just gave the secretary extraordinary power over $700 billion dollars that he basically could have done anything he wanted to do with. And that was unacceptable.
And so, Congress came back, and the leaders of both parties in Congress negotiated with the administration to come up with a compromise deal. They thought they had a deal; they thought they had it all worked out. But then when it actually got voted on in Congress, it failed to pass by 12 votes.
So, they're kind of back to the drawing board. The immediate consequence of this is that the stock market did really badly at first, and there's also a further and further tightening of credit markets. The people who borrow and lend money just aren't getting together. Lenders are not coming forward and lending money in even routine ways that just keep the economy going as we go along--keep businesses able to make payroll, maintain inventory. And soon it could start affecting routine personal borrowing--home loans, auto loans, student loans, and that sort of thing.
Why does it matter? And what can we do?
This is really important because the financial sector problems on Wall Street are going to start moving to the broader economy, and we're starting to see that. The loans that are needed--the borrowing, the every day give and take of the financial markets, and the credit markets--are part of the grease that lubricates the economy. And if businesses can't borrow, they're not going to be able to make payroll, they're not going to be able to pay people, they're going to have to lay people off or skip paychecks. They're not going to be able to maintain inventory, so you're going to start seeing shortage in the stores. Personally, we individually are going to have trouble if we need certain kinds of loans, or even our credit cards could start getting affected. So, this won't happen in a day or two days on a widespread basis, but over the next month, if nothing is happened, we could start seeing very very serious problems.
In the short term, we need a rescue package. Ideally, it would be a rescue package that did something about the underlying loans, the mortgage loans that were made that are really the underlying cause to our problems. They're the things that are very low valued right now, that are on the books of the lenders, that are making them very reluctant to lend out any more money. And one of the keys here is to get the loans that are in trouble, that people are having a hard time paying, turn those into paying loans by modifying them, by bringing down the value of those loans to what the houses are really worth now and making sure that they're on terms that people can pay. Now, not every single loan will this be possible for. We can only do that for loans where people want to pay, have the ability to pay, and where there's a house that's worth something. So this isn't really a bailout for those people; it's just getting the loans back on terms that are reasonable and fair.
Now, it's not just for them, though. It's really important that this be done because these bad loans and these foreclosures that are happening are undermining home values across the entire housing sector, so everybody's homes are affected by this, and it's also affecting the basic financial markets in ways that are going to end up hurting all of us. So that's a really very important component that should be included in a rescue package.
In the long run, we need to address a longer run economic problem, which is the fact that wages have been stagnant or falling for eight years, and we've had very anemic job creation in this economy, and the way to get to that is to make more fundamental investments--to invest in energy transformation and a low-carbon economy, and to do reform in health and education.