The Financial Crisis: Now What?

DAVID KOTZ
Kotz is professor of economics at the University of Massachusetts at
Amherst. He said today: "The $700 billion Paulson bailout bill passed
Congress, but as its critics warned, it has not stemmed -- or even
slowed -- the financial crisis. It is great for the bankers, but it
does nothing to solve the underlying set of problems behind the
financial crisis. Huge and growing income inequality forced millions of
families to take out inadvisable loans to keep afloat. Deregulation
allowed financial institutions and their executives to get rich by
creating new securities based on loans to low-income families that
magically appeared safe to hold. It worked as long as the housing
bubble kept inflating. Once it burst, the inevitable result was both a
financial crisis, due to all those bad securities, and a severe
recession from the end of families' ability to keep paying their bills
by borrowing.

"Immediate government intervention is needed, but it should address the
real problems: 1) stop the foreclosures by rewriting the unfair
mortgage terms for millions of struggling families, so that they can
either afford the payments or remain in their home as renters; 2) take
over problem banks and restructure them as needed, so that the
taxpayers will gain when the economy and financial system recover. For
the longer run, major steps should be taken to reduce income inequality
and regulate the entire financial system to prevent any more rounds of
dangerous speculative investments."

DOUG HENWOOD
Henwood is author of the book Wall Street and editor of Left Business Observer.
He said today: "Paulson has assembled around himself a gang of old
Goldman Sachs cronies to run the bailout. We have to be careful that
all the Goldman alums -- who are very clever people -- don't direct
several scores of billions into the coffers of their former employer.
And the solution to that is not to put another Goldman alum, like
supposed wise man Robert Rubin, in charge instead."

Reacting to last night's debate, Henwood said: "It was encouraging to
hear Obama talk about shaping the $700 billion bailout plan in a more
constructive direction. The broad wording of the law gives the Treasury
Secretary enormous flexibility to do pretty much whatever he (and maybe
someday she) wants. And Obama did say some good things about using that
discretion to help troubled homeowners avoid foreclosure, and make sure
that Wall Street titans don't use public funds to refill their troughs.
But given the generosity of many big Wall Streeters in funding his
campaign, I'll believe it if and when I see it.

"McCain was on autopilot, reciting tired old right-wing talking points
that might have sounded fresh, even if dumb and cruel, 25 or 30 years
ago. Now they just sound like they emerged from a time capsule. The
only exception was his proposal to spend $300 billion to buy up
distressed mortgages -- not a bad idea, but something that he seemed to
come up with on the spot. Even Mitt Romney was surprised to learn about
it. It would have been nice if he'd promoted that during the suspension
of his campaign, when he was supposed to be shaping the bailout. Now it
just looks like rank opportunism, and at odds with everything else he
stands for.

"There is a germ of truth to the Republican argument that Democrats
encouraged Fannie and Freddie to support reckless lending -- it was a
market-based solution to the problem of inadequate housing that was a
bad substitute for public housing and other forms of support to the
poor. But you're not likely to hear a New Democrat say anything like
that.

"I was massively disappointed, however, that Obama didn't challenge the
premise [put forward by moderator Tom Brokaw and McCain] that Social
Security was in trouble and needed radical surgery of some unspecified
sort. It's not in trouble, and needs no major overhaul. Apparently
'change' doesn't extend to challenging conventional nonsense like that."

PATRICK BOND
Currently visiting the U.S., Bond is author of the recent paper "The
U.S. financial meltdown: What really happened? Roots of the economic
crisis in overaccumulation, financialization and 'global apartheid.'"
Bond is a political economist and research professor at the University
of KwaZulu-Natal School of Development Studies in South Africa, where
he directs the Center for Civil Society. Bond's recently authored and
edited books include Looting Africa: The Economics of Exploitation, Talk Left, Walk Right and Against Global Apartheid: South Africa meets the World Bank, IMF and International Finance. Patrick was the drafter of 15 policy papers for the South African government from 1994-2001.
More Information

Correction: An Oct. 1 IPA news release quoted Timothy Canova stating
"There are almost 10,000 foreclosures a day now." It should have read
"almost 10,000 foreclosures a week."