Ask the Experts: 4 questions about the bailout
Confused about the financial meltdown and Wall Street bailout? We asked economist Dr. Robert Pollin for his take on the situation. Dr. Pollin is a widely-respected professor of economics and co-director of the Political Economy Research Institute at the University of Massachusetts, Amherst. He is author, among other works, of Contours of Descent: U.S. Economic Fractures and the Landscape of Global Austerity (Verso, 2003) and has consulted for the United Nations.
FACING SOUTH: Some have compared the current situation to 1929. Specifics of that analogy aside, how big of a problem are we looking at?
DR. POLLIN: This is certainly an enormous problem, comparable in severity to 1929. The main difference between now and 1929 is the role of bailouts. The U.S. government didn't do bailouts then, so the financial system collapsed completely. When the U.S. Treasury and Fed allowed Lehman Brothers to collapse two weeks ago is when the situation really became desperate. At that point, Wall Street was panicked by the thought that they wouldn't get bailed out-that is, that they were really going to play by free market rules. Now they know better: we are still living in a situation where Wall Street is able to privatize gains, and socialize losses.
FACING SOUTH: What brought us to this point? Were there any key policy decisions along the way that exacerbated the problem?
DR. POLLIN: Financial crises are free market capitalism as usual. The only thing that prevents chronic crises is when markets are heavily regulated. So when financial deregulation began in earnest in the late 1970s is when we began to see the reemergence of financial crises. The specifics are different each time, but the general point has remained: without strong controls, financial markets turn into a casino. That then inevitably leads to a financial crisis.
FACING SOUTH: What's your take on the $700 billion bailout plan Congress is considering?
DR. POLLIN: Some type of bailout is needed. But it doesn't need to be done with taxpayers' money. If the Fed conducted the bailout the way it has conducted other bailouts, they simply expand their lending capacity, tied to their ability to create money. That is, pretty much the way they conduct normal day-to-day monetary policy. If we proceeded with the bailout that way, we would not have to rely on taxpayer funds at all. Beyond that, the bailout must come with conditions: 1) a moratorium on home foreclosures; 2) limits on salaries for firms accepting government support; 3) a tax on all speculative financial transactions; 4) cash reserve requirements against speculative asset holdings; and 5) credit subsidies to support productive investments for social priorities, such as green investments and affordable housing.
FACING SOUTH: It seems that some of this is an inevitable consequence of the U.S. economy's shift to being increasingly driven by finance, a volatile sector. Do you think that's true? If so, what does that mean for new policy directions we should be talking about to build a stronger and fairer economy?
DR. POLLIN: The long-term trend has been toward "financialization" of the U.S., and global, economy-i.e. the dollar value of financial transactions relative to the level of productive activity has grown exponentially for roughly a generation. The percentage of income derived from such transactions has correspondingly grown exponentially. We definitely need to redirect finance and investment to producing useful things -- like a clean-energy economy, more decent jobs, and affordable housing.