Who's Afraid of the Big Bad Bail Out? Or Populism Run Amok.

If a newly revised economic rescue package is not passed by the Senate tonight, the 202 Representatives in the U.S. House who voted against Monday's version of the bail out package will go down in history as the idiots who tipped the U.S. economy into the deepest economic downturn since the 1930's. (Can you say Smoot-Hawley Tariff Act of 1930!) Instead of stepping up to the plate, exercising leadership, and communicating to their constituents in a clear and concise way, why the U.S. banking system is about to collapse and desperately needs an emergency cash infusion to unfreeze credit markets, they caved into the simplistic, parochial, uninformed demands of the ideologues whose unfettered free-market, anti-regulation ideology got us into this mess in the first place. It appears that no one (especially not dead-duck George W.) is in charge and no one is able to avert what is turning into both an economic and a political crisis.

I find it ironic that these same ideologues now want to point their fingers of blame primarily at greedy Wall Street investment bankers and traders. These speculators were merely responding to the huge incentives (greed is good) created by our casino economy and almost universal buy in to the economic philosophy that the Republican Party has espoused since Ronald Reagan weakened the Glass-Steagall Act. Well now we know how inadequate disclosure requirements and regulation of debt in proportion to cash ratios, backfires in the financial industry.

Apparently the reason the rescue was voted down was because in our current age of anti-intellectualism and Joe Six Pack politics, our elected officials don't really understand the financial crisis. I don't expect all our politicians to have the expertise of economists, but I do expect them to have enough understanding of the U.S. and world economy to avoid plunging the world into a deep recession. So I'll offer up a little primer on what happened and what we need to do to fix it:

By now everyone is familiar with the role of mortgage-backed securities aka collateralized debt obligations (CDO's) in the current credit crisis. CDO's are the securities created when mortgages issued by community banks around the country are bought by financial institutions, pooled and packaged into securities. These securities are then traded by banks and investment firms on Wall Street and around the world. As long as housing prices were rising and the economy was strong, the value of these bonds and thus the returns on investment earned by the firms with the CDO's on their books kept rising.

During the past year the economy began to falter (oil and other commodity prices skyrocketed, business profits went down, job losses went up, and housing prices, due to an imbalance of housing supply and demand, finally went down) and suddenly people were unable to pay their mortgages either because they had lost their jobs, or their adjustable-rate mortgage payments had ratcheted up and they were no longer able to stay on top of their monthly payments. As loan defaults increase, the value of the CDO's nose-dive. And Wall Street investment banks were leveraged something like 30 to 1 in these CDO's and the even more insidious credit-swap derivatives (a financial instrument designed to hedge against a decline in the price of the CDO's)were really the financial instruments that caused the whole system to unravel. Warren Buffet has referred to these swaps as weapons of mass financial destruction.

Essentially the stock market meltdown was a perfect storm of overly leveraged financial firms, the bursting of the real estate bubble, predatory mortgage lending, greed at all levels including from the consumers who refinanced their homes to pay for the purchase of flat screen TVs, high end appliances, new cars every couple of years, expensive vacations, and too many meals out that they really couldn't pay for out of their current incomes.

There is plenty of blame to go around. I don't feel sorry for the high flying, overly-compensated Wall Street speculators who suddenly have lost their wealth and their reputations, but I do feel sorry for their firms' rank and file employees and anyone who has watched the value of their pensions, 401K retirement funds and college savings accounts crash over the past year. I am especially concerned about those folks who are retired or about to retire and are living on a fixed income and those of us who are going to have to work 10 years longer than we planned before we can retire.

So what does Congress need to do? They need to authorize the Treasury to buy up enough of the bad debt on the books of the financial firms and banks to unfreeze the flow of credit and restore confidence in the U.S. banking system. Otherwise none of us, consumers, small businesses, farmers, or big corporations, is going to be able to take out loans. Credit is the grease that lubricates the gears of commerce at all levels. Without credit the economy will grind to a halt, literally. If the big Wall Street banks can't extend credit to mid-size and small banks, they in turn won't be able to extend credit to local consumers and businesses in their communities. This is the bad news in a trickle down economy.

This brings me to the real point I want to make in this blog. You can't build a viable economic system that is not based on good paying middle class jobs. To create these jobs we need to invest: invest in education so our kids have the skills and knowledge to compete for jobs in the global economy, investment in a green revolution so we can get off dependency on fossil fuels and create new green collar jobs while averting environmental catastrophe, and also investment in a universal health care system. Not only are millions left out in our current employer-paid health care, but the spiraling health care costs are crippling the competitiveness of the few manufacturing industries we have left in this country. The real tragedy is that between the wars in Iraq and Afghanistan, and now the unavoidable need for a $750 billion bail out, these investments most likely will be postponed further into the future.

So Congress, please pass a rescue bill quickly so we can get the economy back on track. Do it before it's too late. While you are at it, rethink your worship of unregulated, free market, trickle down economics and put in place a system so that this type of financial meltdown can't happen again. And let's all hope the tax payer will eventually recoup part if not all of their investment in stabilizing the banking system and the economy.

Perhaps to accomplish this we will need to elect new leaders and we will need to get our best and brightest young people to go into government service, especially as regulators, instead of heading off to Wall Street to line their pockets because they are light years ahead of the regulators in terms of their knowledge of finance. Limits on executive compensation, particularly stock options would be a good place to start. If the smartest guys and gals in the room go into public service instead of investment banking, the economy will really take off.

In November, I'll be voting for the compassionate guy who graduated from Columbia and Harvard, and acting on his values, decided to become a community organizer and then went into public service instead of heading to Wall Street.