If the President, or someone, would tell the truth

Wall Street's Great Deflation

by William Greider

The Nation.com blogs - July 14, 2008 @ 12:38pm

http://www.thenation.com/blogs/notion/336722/print

Phil Gramm, the senator-banker who until recently
advised John McCain's campaign, did get it right about
a "nation of whiners," but he misidentified the faint-
hearted. It's not the people or even the politicians.
It is Wall Street--the financial titans and big-money
bankers, the most important investors and worldwide
creditors who are scared witless by events. These folks
are in full-flight panic and screaming for mercy from
Washington, Their cries were answered by the massive
federal bailout of Fannie Mae and Freddy Mac, the
endangered mortgage companies.

When the monied interests whined, they made themselves
heard by dumping the stocks of these two quasi-public
private corporations, threatening to collapse the two
financial firms like the investor "run" that wiped out
Bear Stearns in March. The real distress of the banks
and brokerages and major investors is that they cannot
unload the rotten mortgage securities packaged by
Fannie Mae and banks sold worldwide. Wall Street's
preferred solution: dump the bad paper on the rest of
us, the unwitting American taxpayers.

The Bush crowd, always so reluctant to support federal
aid for mere people, stepped up to the challenge and
did as it was told. Treasury Secretary Paulson (ex-
Goldman Sachs) and his sidekick, Federal Reserve
Chairman Ben Bernanke, announced their bailout plan on
Sunday to prevent another disastrous selloff on Monday
when markets opened. Like the first-stage rescue of
Wall Street's largest investment firms in March, this
bold stroke was said to benefit all of us. The whole
kingdom of American high finance would tumble down if
government failed to act or made the financial guys pay
for their own reckless delusions. Instead, dump the
losses on the people.

Democrats who imagine they may find some partisan
advantage in these events are deeply mistaken. The
Democratic party was co-author of the disaster we are
experiencing and its leaders fell in line swiftly.
House banking chair, Rep. Barney Frank, announced he
could have the bailout bill on President Bush's desk
next week. No need to confuse citizens by dwelling on
the details. Save Wall Street first. Maybe lowbrow
citizens won't notice it's their money.

We are witnessing a momentous event--the great
deflation of Wall Street--and it is far from over. The
crash of IndyMac is just the beginning. More banks will
fail, so will many more debtors. The crisis has the
potential to transform American politics because, first
it destroys a generation of ideological bromides about
free markets, and, second, because it makes visible the
ugly power realities of our deformed democracy.
Democrats and Republicans are bipartisan in this crisis
because they have colluded all along over thirty years
in creating the unregulated financial system and
mammoth mega-banks that produced the phony valuations
and deceitful assurances. The federal government
protects the most powerful interests from the
consequences of their plundering. It prescribes "market
justice" for everyone else.

Of course, the federal government has to step up to the
crisis, but the crucial question is how government can
respond in the broad public interest. Bernanke knows
the history of the last great deflation in the 1930s--
better known as the Great Depression--and so he is
determined to intervene swiftly, as the Federal Reserve
failed to do in that earlier crisis. By pumping
generous loans and liquidity into the system, the Fed
chairman hopes to calm the market fears and reverse the
panic. So far, he has failed. I think he will continue
to fail because he has not gone far enough.

If Washington wants real results, it has to abandon the
wishful posture that is simply helping the private
firms get over their fright. The government must
instead act decisively to take charge in more
convincing ways. That means acknowledging to the
general public the depth of the national crisis and the
need for more dramatic interventions.

Instead of propping up Fannie Mae or others, the
threatened firm should be formally nationalized as a
nonprofit federal agency performing valuable services
for the housing market. That is the real consequence
anyway if the taxpayers have to buy up $300 billion in
stock.

The private shareholders "are walking dead men,
muerto," Institutional Risk Analytics, a private
banking monitor, observed. Make them eat their losses,
the sooner the better. The real national concern should
be focused on the major creditors who lend to Fannie
Mae and other US agencies as well as private financial
firms. They include China, Japan and other foreign
central banks. Foreign investors hold about 21 percent
of the long-term debt paper issued by US government
agencies--$376 billion in China, $229 billion in Japan.

It is not in our national interest to burn these
nations with heavy losses. On the contrary, we need to
sustain their good regard because they can help us
recover by bailing out the US economy with more
lending. If these foreign creditors turn away and stop
their lending now, the US economy is toast and won't
soon recover.

Americans should forget about whining; it's too late
for that. People need to get angry--really, really
angry--and take it out on both parties. What the
country needs right now is a few more politicians in
Washington with the guts to stand up and tell us the
hard truth about out situation. It will be painful to
hear. They will be denounced as "whiners." But truth
might be our only way out.

[National affairs correspondent William Greider has
been a political journalist for more than thirty-five
years. A former Rolling Stone and Washington Post
editor, he is the author of the national bestsellers
One World, Ready or Not, Secrets of the Temple, Who
Will Tell The People and, most recently, The Soul of
Capitalism (Simon & Schuster).]