The Wrong Emergency
Roger Lowenstein:In 1932, at the height of the Great Depression, the government created the Reconstruction Finance Corp. to make loans to banks, railroads and others. President Hoover asked for $2 billion—equivalent in today’s money to $30 billion—and spent just under that amount in the RFC’s first year. The country then was in the midst of an economic catastrophe. Economic output had dropped 45 percent. Production of steel and autos were each down by three-quarters. Unemployment was 24 percent, and so on.
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America’s economy does not face an emergency—only its financial system does. This is a distinction lost on the bankers in Washington, but it is one worth remembering. On Main Street, unemployment is 6.1 percent. Home prices are down close to 20 percent and presumably headed lower. These numbers are not pretty, but they do not add up to an economic Pearl Harbor or even close.
Of course, potentially several million Americans face home foreclosure. That is a crisis, but it is a slow-developing one, for which the normal legislative process—as distinct from a shotgun corralling of Congress—will suffice. And the Paulson plan does not help homeowners.
The only emergency is on Wall Street, and that is entirely of Wall Street’s making. It was the banks that made the loans, the banks that bought the paper, the banks that dumbly believed the models that said that housing prices wouldn’t collapse. The pinstriped bankers who leveraged their institutions’ capital thirty-to-one so as to inflate their profits (and their personal take) now complain they were done in by those nasty short-sellers. How touching to see executives from the likes of Lehman Brothers, not normally an institution associated with widows and orphans, squawk about cutthroat tactics. Regardless, had they not borrowed so much, they would not have been vulnerable.
