The Bailout: The Role of Government and the Value of the Assets
In small decisions lie big issues. America’s approach to the financial crisis reveals fault lines and contradictions in our approach to some very fundamental issues. Those fault lines and contradictions signal–and may even require–a profound rethinking of the role of government and our conception of our place in the world.
Take, for example, one of the knottier problems in the present bailout plan: What is the worth of the assets to be removed? Ten cents on the dollar? Twenty cents? Thirty cents? Zero?
The question is absolutely crucial; yet it may prove intractable. If the government overpays, firms stand to make a bundle. If the government underpays, firms may be pushed over the edge. Some may fall if anything but the full price is not paid. And some that can weather the storm would gladly have those bad assets taken off the books, a real Christmas bonus if you will.
And yet the fact may be: No one may know for sure. And are we willing to let the market place decide? Are we willing to take that risk? What are our options here?
Brad Setser points out that Sovereign Wealth Funds–such as the China Investment Corporation, the Government of Singapore Investment Corp, and others–have already poured about 55 billion into troubled U.S. financial firms. These cash infusions were investments, not gifts, not bailouts–investments. With those investments SWF’s began to exercise influence and control.
The question now is: Should the U.S. simply use that cash to buy a stake in some companies–or even purchase some of them outright? Brad puts it this way:
Is it really better to reward the banks’ existing equity investors — remember, they own the financial institutions that made the bad bets that led the financial system to seize up – to avoid a US government equity stake?
If the U.S. government simply takes the bad debts off the books, it runs two risks. The first is determining exactly what those debts are worth–with all the uncertainty mentioned above. The second is that the U.S. government is now one big bank with lots of bad debts. And we know who will pay those debts. You and me.
On the other hand, as one wag noted: “With equity comes control.” Control and influence has been an on-going issue whenever foreign interests–especially government sponsored ones–have purchased a significant equity stake in any important U.S. firm or asset.
If the U.S. government buys an equity state, then we certainly are on our way to socialism–like it or lump it. (Some commentators assert that we have already taken that step with AIG.) The irony, of course, is that those who most loudly espoused open markets and capitalistic enterprises took the first steps towards socialism. (If the market place should determine asset value, then perhaps the government should be one of the bidders.)
How much of a future does individual, freewheeling capitalism have in a world increasingly dominated by larger and larger players, larger and larger problems? When individual players become too large to fail, must the largest entity of all–the government–inevitably come to the rescue? And what do we do when problems become so large that private enterprise simply does not work.
Some of the problems we have faced in the past two decades have raised this last kind of question about the role of government.
Health care is a good example. We know that our health care is a mess, more expensive here than elsewhere; yet we have stubbornly refused to surrender our belief that private enterprise and competition are working. Costs continue to escalate; shopping for the best policy is almost a full-time job. One wrong accident or wrong illness can easily bring bankruptcy and destitution. Meanwhile, we tinker at the periphery. Slowly, kicking and screaming, we may finally throw up our hands, throw out the insurance companies–and go to a fully funded governmental program, along with the requisite fee schedules.
I am not saying this will happen–or that it should happen. What I am saying is that what we have is not working. The role of government is still an issue.
The majority of Americans believe that government is the problem, not the solution. That government governs best that governs least. That old saw may have been true a century ago when the nation and its problems were far smaller and less complex. Is it still true today?
That belief has been central to how we have approached almost every issue. Even now, as Bush, Paulson, and Bernanke still do not fully recognize what is happening. In simply removing the bad debts, they are, in a sense, playing the capitalist game. They still believe that private, unfettered enterprise is the answer. Once the bad debts are removed, all will be well. We can return safely to the old game.
But most realize that the bailout may simply privatize the profits and nationalize the losses. Most are not willing to open their checkbooks. They want to know how they, as taxpayers, will benefit. The complaint about more golden parachutes is not an idle one. It calls into question how wealth is being distributed, how jobs are being lost, how the majority of us struggle daily to stay afloat. Now, whether they realize it or not, most have a real stake in this latest exercise. They may begin to ask for a equity stake; the government should make a little money for them–or, at the very least, save them money. If government is to be involved, why should it not benefit the vast majority?
This kind of thinking may well spread to other areas as well–foreign policy, for example. Our latest foreign adventures in Iraq and Afghanistan have been pursued with little regard to cost–at least as far as the average citizen is concerned. They have been luxuries, luxuries they we may now ill-afford.
As long as few American lives were lost, we did not have to worry. What if Haliburton soaked the government? Some purists were disturbed; most could not care. At best they whined a bit, drank some beer, and watched survivor t.v. They were comfortable.
Now, many are deeply worried about their own financial future. Why should they spend good taxpayer dollars in bringing “freedom” to others? If others want freedom, perhaps they should earn it themselves. (But whoever believed that tripe about bringing freedom to the world anyways? Sloppy thinking is always a luxury–but not anymore.) The party is over; time for serious reflection.
We are fast approaching the time when we will have to think even further outside the box, remove our ideological blinders, and look directly at the problems of this century–and fashion our solutions so that they address the problems, not confirm our beliefs. The financial debacle is only the first of a number of problems that we will face in the next ten years.
After the financial crisis is over, we will have to address the issue of trade and jobs. What exactly is the engine that will bring this country out of the doldrums? And how do we fashion it? What will be government’s role. Some want the government just to invest in infrastructure in order to create jobs–and bolster the economy.
Can we simply build infrastructure without addressing the issue of trade? Does a government just build infrastructure and hope for the best? Do we continue to construct trade agreements that encourage companies to flee our shores for cheaper labor elsewhere?
And further ahead lie resource depletion, pollution, and global warming are ahead–in that order. All of these problems will necessitate rethinking the role of the government.
Fractured as well is our view of our place in the world. New American Century? America projecting its power into every corner of the world? I do not think so. Already the cracks in that argument are appearing as we listen to McCain and Obama discuss Iran.
Will we still be powerful enough to dictate terms, simply refusing to talk with our adversaries–Iran– (as McCain suggests)–or do we engage them (as Obama wants)? While some would see Obama’s approach as saner and more logical, the approach is, nonetheless, a tacit admission that we may no longer be in a position to dictate terms. The implications for the Middle East are enormous. Taking a more modest approach will bring its problems as well as its rewards.
Ironically, as we have celebrated the glories of capitalism and the individual, our government has become increasingly intrusive into spying on its citizens–all in the name of safety. How do deal with this? What is the role of government here?
I do not have the answers, but I do know that we will have to address the issue of governance along with who we are and what we believe. The issue is slowly but surely coming to the fore.
Old platitudes will simply not work. They have become brittle and useless as arguments. Our country is fractured with contradictions. Big Brother must spy; yet we believe in individual rights. Big government must bailout Wall Street; yet we believe that the market place knows best. Big Brother should stay out of health care; yet our health care is on the verge of collapse. The list goes on and on. The old order is dying. It will not go easily into any night.
Who would have thought that the arrogance that produced the “The Project for the New American Century” would so quickly have been brought to heel.