Friday, April 16, 2010

Why have fire departments?

(photo by millzero)

Let's start with this article by Nobel Prize-winning economist Paul Krugman. Shocking, isn't it?

On Tuesday, Mitch McConnell, the Senate minority leader, called for the abolition of municipal fire departments.

Firefighters, he declared, “won’t solve the problems that led to recent fires. They will make them worse.” The existence of fire departments, he went on, “not only allows for taxpayer-funded bailouts of burning buildings; it institutionalizes them.” He concluded, “The way to solve this problem is to let the people who make the mistakes that lead to fires pay for them. We won’t solve this problem until the biggest buildings are allowed to burn.”

Well, why not? Public fire departments are just "socialism," after all. Why should the government get involved? If I own a firetrap, I should just accept the risk that my property might burn to the ground, right?

Of course, that's completely ridiculous. Fire tends to spread. If my house catches fire, my neighbor's house might be the next to go. Even in rural areas that's the case, certainly here in Nebraska, where fires spread literally on the wind. After many devastating fires in large cities, we eventually learned the value of public fire departments, "socialism" or not.

O.K., I fibbed a bit. Mr. McConnell said almost everything I attributed to him, but he was talking about financial reform, not fire reform. In particular, he was objecting not to the existence of fire departments, but to legislation that would give the government the power to seize and restructure failing financial institutions.

But it amounts to the same thing.

Another thing we learned long ago was that bank failures also tend to spread. When one bank collapses, there's a good chance that other banks will also collapse, with bankruptcies spreading from one to another. I was going to say that we learned this in the 1930's, but in fact, we learned that long before then. But it was only in the 1930's that we came up with a solution: the federal regulation of banks, which was combined with a guarantee of deposits.

And it worked great! It completely stopped the periodic cascades of bank failures that had plagued America since our founding. Unfortunately, as the Great Depression faded from our collective consciousness, right-wing ideologues started dismantling those protections that had served us so well. At the same time, financial innovation created new ways to get around the old rules on regulation. Well, we all know what happened then, don't we?

In his speech, Mr. McConnell seemed to be saying that in the future, the U.S. government should just let banks fail. We “must put an end to taxpayer funded bailouts for Wall Street banks.” What’s wrong with that?

The answer is that letting banks fail — as opposed to seizing and restructuring them — is a bad idea for the same reason that it’s a bad idea to stand aside while an urban office building burns. In both cases, the damage has a tendency to spread. In 1930, U.S. officials stood aside as banks failed; the result was the Great Depression. In 2008, they stood aside as Lehman Brothers imploded; within days, credit markets had frozen and we were staring into the economic abyss.

So it’s crucial to avoid disorderly bank collapses, just as it’s crucial to avoid out-of-control urban fires.

Since the 1930s, we’ve had a standard procedure for dealing with failing banks: the Federal Deposit Insurance Corporation has the right to seize a bank that’s on the brink, protecting its depositors while cleaning out the stockholders. In the crisis of 2008, however, it became clear that this procedure wasn’t up to dealing with complex modern financial institutions like Lehman or Citigroup.

So proposed reform legislation gives regulators “resolution authority,” which basically means giving them the ability to deal with the likes of Lehman in much the same way that the F.D.I.C. deals with conventional banks. Who could object to that?

Well, we all know the answer to that, don't we? Since this was proposed by a Democratic president and Democrats in Congress, the "Party of No" must oppose it. It's as simple as that. The good of the country is nothing to them, compared to political advantage.

But how in the world could this tactic work for them? We've just seen the results of the GOP mania for financial deregulation, and bankers are nearly as unpopular as terrorists (more unpopular than Christian terrorists, I suspect). Republicans had always claimed than bank CEO's didn't need regulation, which would just hold them back, because they'd just naturally do the right thing.

Unfortunately, it turned out that the right thing for bank executives - increasing risk in order to maximize their multi-million dollar annual bonuses - was not the right think for the banks, and certainly not for America. When banks collapse, the executives keep all that money they got in previous years. Shareholders lose big, but not bank CEO's. That's one reason why deregulation didn't work. We all saw it, and just recently. So how could anyone argue otherwise?

Now, Mr. McConnell surely isn’t sincere; while pretending to oppose bank bailouts, he’s actually doing the bankers’ bidding. ...

His talking points come straight out of a memo Frank Luntz, the Republican political consultant, circulated in January on how to oppose financial reform. “Frankly,” wrote Mr. Luntz, “the single best way to kill any legislation is to link it to the Big Bank Bailout.” And Mr. McConnell is following those stage directions.

Ah, yes. The "bailout" isn't popular, to say the least. It just didn't seem fair - and it wasn't, not really. It was just necessary. Would you really cut off your nose in order to spite your face? Doubtful. So why would you accept a complete meltdown of our global economy just because a rescue attempt wouldn't be "fair"?

Of course, most people are also very confused about the "bailout." For one thing, this was something undertaken by the Bush administration, not Barack Obama. The TARP program happened before Obama took office. I've got to give them at least some credit for that. They may have wrecked our economy, but they did the right thing in this case,... basically. Yes, it was far from perfect. But it didn't "bail out" the owners of these banks. They lost almost everything. It just kept the business itself as a going concern.

So yes, it benefited some of the bank employees who caused these problems in the first place. And it benefited bond-holders, since they didn't lose on supposedly "safe" investments. But mostly, it benefited us. It benefited all of us, by keeping our economy from crashing further. This is why we're not currently in another Great Depression. Bad as this economy is, it could have been far, far worse.

It’s a truly shameless performance: Mr. McConnell is pretending to stand up for taxpayers against Wall Street while in fact doing just the opposite. In recent weeks, he and other Republican leaders have held meetings with Wall Street executives and lobbyists, in which the G.O.P. and the financial industry have sought to coordinate their political strategy.

And let me assure you, Wall Street isn’t lobbying to prevent future bank bailouts. If anything, it’s trying to ensure that there will be more bailouts. By depriving regulators of the tools they need to seize failing financial firms, financial lobbyists increase the chances that when the next crisis strikes, taxpayers will end up paying a ransom to stockholders and executives as the price of avoiding collapse.

Even more important, however, the financial industry wants to avoid serious regulation; it wants to be left free to engage in the same behavior that created this crisis. It’s worth remembering that between the 1930s and the 1980s, there weren’t any really big financial bailouts, because strong regulation kept most banks out of trouble. It was only with Reagan-era deregulation that big bank disasters re-emerged. In fact, relative to the size of the economy, the taxpayer costs of the savings and loan disaster, which unfolded in the Reagan years, were much higher than anything likely to happen under President Obama.

Wall Street executives have made out like bandits in recent years, and it's not just Bush's (and Reagan's) tax cuts for the rich. Risky behavior pays off for CEO's and other executives who get multi-million dollar bonuses based on short-term profits. They pocket that money when times are good, and they keep it even when they run their corporation into the ground. When the music stops, the rest of us are left in the lurch, while Wall Street executives risk little or nothing.

None of this should be surprising. We don't even have to go all the way back to the 1930's, because we also went through it in the savings and loan disaster, during the Reagan administration (but not between the two eras, when financial regulation was kept intact). The facts aren't even in dispute. It's just that Wall Streeters want to keep this pattern of "I win, you lose" since it's very lucrative for them personally. And Republicans are their guys in the government.

Of course, these days that might not even matter, much. If Democrats propose anything, the Republicans will automatically oppose it. And they'll not just vote against it, in one solid block, but try to prevent a vote from even taking place, using the filibuster for virtually everything these days. Why do we let them get away with this? Well, they're good at confusing ignorant, gullible people - and they've got Fox "News" pushing their lies all the way.

Should we get rid of public fire departments? Of course not! And we shouldn't get rid of government oversight of the financial industry, either - for basically the same reason. When a fire starts, there's a good chance that it will spread. So it's in our interest - all of us - to see that the initial fires are contained, as quickly, as easily, and as cheaply as possible.

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