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Some Thoughts on “The Big Socialist Bailout”

Posted by Rob Weigand.

There’s been an enormous divergence of opinion over the way the bailout of the U.S. financial system is being handled (or, more accurately, the way government officials are proposing to handle it). My question is, do any of the critics have a better solution to the problem? Probably not. And I certainly don’t have one, either. One thing we can all agree on is that it is a big, stinking mess of epic proportions.

What the critics don’t seem to realize is that there is a significant chance that the entire global financial system may suffer a liquidity run leading to mass insolvency — something that could trigger a deep recession, maybe even a global depression. Systemic contagion continues to spread at an increasing rate, and rather than run the risk that it will “work itself out” via widespread bankruptcy filings, the powers-that-be opted to cobble together a backstop program. And there’s still no guarantee the government plan will work, despite the almost trillion-dollar commitment.

And yes, this means the U.S. is taking steps towards instituting a European-style socialist solution. It’s probably best to just take a deep breath and let all that go for now. I would argue that one of the main factors that makes the socialist form of the bailout appear so humiliating is the way the ultra-conservatives have spent the last 25 years bashing the European style of capitalism. It’s time to wake up to the truth: The European way of doing things is no better or worse than the American way — it’s just different. U.S. politicians and business leaders should stop preaching to the rest of the world that we have better styles of capitalism and democracy. The collapse of our financial system is a national humiliation, and it would be refreshing to see our business and political leaders begin acting with an appropriate measure of humility over the mess we’ve all made — lenders, borrowers and politicians are all partly to blame. This financial crisis is a by-product of, and harsh commentary on, the American way of life and its focus on profligate consumption.

To make the socialist bailout somewhat easier to swallow, allow me to point out that the U.S. has always practiced subtle forms of socialism. The big bailout is just another (albeit much larger) move in that direction. Public services like K-12 education and police and fire protection are all forms of socialism — our society pools tax dollars and provides everyone with access to the same services regardless of the magnitude of their contribution.

I am also of the opinion that conservatives are trying to focus public attention on the “socialist” smoke screen to take our mind off the role big business has played in creating this crisis. Large financial institutions behaved in a predatory fashion when they loosened lending standards and saddled millions of American households with unsustainable amounts of debt. And, these institutions were aided and abetted by the semi-“socialist” GSAs (Fannie and Freddie), whose existence made possible an explosion of mortgage debt that is now smothering our financial system. Of course, consumers deserve an equal share of the blame — they flagrantly overborrowed and overconsumed. And the failure of regulators to curb excessive leverage in the financial system is another notable cause of the crisis. Everyone shares in the blame.

The U.S. led the world into this mess — we have to accept that, it’s inarguable. We haven’t been practicing a better form of capitalism all these years, just a different form. And the way we practice capitalism will be permanently changed by this bailout. It’s going to be impossible for the ultra-conservatives to claim a rational basis for their Europe-bashing going forward (although they’ll probably continue bashing Europe from an irrational stance). The U.S.’s beloved free-market system has created the biggest financial mess of all time, and the Secretary of the Treasury and Chairman of the Federal Reserve Bank believe we need a socialist mop to clean it up. Let’s get over it and move forward.

For those of you who would like to read some of the more intelligent dissent on the topic — none of which offers an alternative solution to the global systemic contagion that is spreading by the day, I’d like to point out — I offer the following links below.

Naked Capitalism    Bloomberg    Luigi Zingales    Robert Kuttner