Everything old on Wall Street is new again

October 27th, 2008 at 06:31pm Annette LaCross

Published Sept. 29:

The most oft-quoted legislator last week was Sen. Jim Bunning, a Kentucky Republican who called the Bush administration’s $700 billion bailout plan for Wall Street “financial socialism and un-American.”

He’s half-right.

It’s part of the socialist agenda — everyone should benefit from capitalism as long as the free market is controlled. In this case, by the federal government. Funded by you and me.

But it’s hardly un-American.

In fact, it’s a rerun. In 1933, the Roosevelt administration created the Home Owners’ Loan Corp. to buy $3 billion — that’s a cool $47 billion or so in 2008 dollars — in bad mortgages and refinance them to homeowners to stem a rise in foreclosures. The government even made a profit on the deal.

Actually, the government has a long and storied history of stepping in when capitalism runs amok, more than a dozen times in the past 80 years. In 1989, the Resolution Trust Corp. was created by Congress to take over bad assets after the collapse of the country’s savings and loans.

So far, the only thing President Bush’s bailout plan has created is a lot of noise.

But despite all the harrumphing on Capitol Hill, the rumpus and ballyhoo from Wall Street to Main, the real problem is that no one can say whether it’s a good idea. That’s because no one, least of all the financial geniuses who got us into this mess, knows whether we’re getting a solid bang for our 7 billion bucks. No one, in other words, has any idea what we’re buying, what it’s worth, what we’re getting ourselves into or what it will look like when the dust settles.

But make no mistake. It has to be done.

Think of it this way: Wall Street is a lonely country road, lined on both sides by telephone poles, strung together by the phone company’s heavy-duty cables.

Nobody has paid much attention to this little road, particularly those charged with making sure it doesn’t get into any trouble, because it hasn’t gotten into any trouble. Hey, no news is good news, right?

Then one of the poles falls over. A crew is dispatched to shore it up before it puts too much pressure on the poles around it.

But by dangling, even briefly, it has already put stress on its companions. The entire interconnected line is thrown off kilter.

Another one falls. The crew leaves the first pole, which they’re pretty sure they’ve repaired, and runs to the other one.

Then another goes, and another — and this one manages to take out an electrical transformer, too. Suddenly, the neat, orderly line of telephone poles begins to look a little sinister.

The crew has a choice. It can leave the pole it’s fixing and move on to the others, but the latest repair won’t be particularly sturdy. In the end, it could do more harm than good.

In the meantime, no one has bothered to look for the source of the trouble. They’re too busy fixing the symptoms to see that the poles are rotting from the bottom up.

Once they see it, however, they move fast. Before any more of the poles fall, they decide to shore up the entire line while they replace the faulty poles.

That, my friends, is what happened on Wall Street. And the federal government is the only place left to turn, the only entity with the financial clout to clean up the debris and start over.

Leaving the geniuses on Wall Street to their own devices — letting them sort out the mess they’ve made — is a grimly satisfying picture. But at this point, they’re not the problem. In fact, they have deftly taken their problem and made it ours.

And the effects — housing losses, job losses, credit losses and one heck of a money pinch — will be felt for decades.

It took at least six years to unravel all the threads of the S&L debacle, and that was only with the help of $125 billion — $200 billion today — from taxpayers.

“I share the outrage that people have,” Treasury Secretary Henry Paulson told the Senate last week. “It’s embarrassing to look at this. I think it’s embarrassing to the United States of America. There is a lot of blame to go around.”

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