Requiem for the Bailout Storyline
It's mid-October, and the Wall Street bailout that was supposed to save the economy from collapse is a flop.
Only two weeks ago, the media hype behind the $700 billion bailout was so intense that it sometimes verged on hysteria. More recent events should not be allowed to obscure the reality that the news media played a pivotal role in stampeding the country into a bailout that was unwise and unjust.
Exceptions in the news coverage underscore the fact that other perspectives were readily available when the Bush administration began pushing its bailout proposal in late September. "Many of the nation's brightest economic minds are warning that if the Wall Street bailout passes, it would be a dangerous rush job," McClatchy Newspapers reported on Sept. 26. For instance, economist James K. Galbraith called the warnings of economic disaster in the absence of a swift bailout "more hype than real risk." He added: "A nasty recession is possible, but the bailout will not cure that."
When the House of Representatives rejected the bailout on Sept. 29, all media hell broke loose. During the next few days, journalists and selected sources took turns decrying the failure of House naysayers to recognize the urgency of the moment. The nation's economy was at stake, and craven ideologues on Capitol Hill were dithering around!
Countless editorials and pundits castigated the House members who had voted no. The condemners spanned the mainline media spectrum; liberals, moderates and conservatives excoriated the House and called for a swift reversal.
Senate passage came on Thursday, Oct. 2, and the next day a chastened House approved a revised version. That Friday afternoon, President Bush signed the $700 billion Wall Street bailout into law.
Despite all the media hype about how the bailout measure would quickly steady the stock market, it fell and kept falling. Over the next week, ending Oct. 10, the Dow made history as stocks plunged by 18 percent in five trading days.
And what about the ostensible main reason for the humongous bailout in the first place -- unfreezing the credit markets? Well, in spite of the enormous media outcry for the bailout to get credit flowing, it didn't. And the key economic factor in the recession -- housing -- remained just as stuck as before.
At the Center for Economic and Policy Research, on Oct. 1 -- two days before the House caved -- economist Dean Baker addressed a pivotal flaw in the spin. "It would be foolish to issue a mortgage loan without a very substantial down payment, since the expected decline in house prices will quickly destroy much or all of the equity held by the homeowner," he wrote. "In other words, it is the drop in house prices that is causing banks to demand 20 percent down payments in many markets, not their lack of capital. This situation will only be changed by a government house-price support program. Improving the financial conditions of banks will make little difference."
But the media storyline required -- in fact, demanded -- that committing many billions of dollars to the "rescue" was the essential step to be taken from Capitol Hill.
After the House initially balked at approving the Wall Street bailout on Sept. 29, the range of New York Times op-ed columnists took turns with the denunciation chores. None was more bitterly caustic than David Brooks. On Sept. 30, under the headline "Revolt of the Nihilists," he denounced the noncompliant House members for failing to heed "the collected expertise of the Treasury and Fed."
A week later, on Oct. 7, when Brooks wrote a follow-up column, the bailout had been law for several days. But the stock market was plunging faster than ever, and the credit crunch was unabated. "At these moments, central bankers and Treasury officials leap in to try to make the traders feel better," Brooks wrote. "Officials pretend they're coming up with policy responses, but much of what they do is political theater."
Now he tells us.
Before the bailout gained approval on Capitol Hill, the media narrative was dangling the prospects of immediate results. But afterwards, there were none.
"Global markets have so far given thumbs down to the giant $700 billion bailout plan," former Labor Secretary Robert Reich said in an Oct. 8 public-radio commentary, five days after the bailout had become law. "The easy answer to why the bailout hasn't worked is it hasn't been implemented yet. But its purpose was largely psychological -- to boost confidence that the government is doing something big to clear out bad debts that have been clogging the system. That psychological boost should have happened as soon as the bailout was enacted. Yet no one seems to believe that $700 billion will make much difference."
On Oct. 12, the lead story on the New York Times front page wondered aloud "whether the administration squandered valuable time in trying to sell Congress on a plan that officials had failed to think through in advance."
The Times now tells us that the much-hyped bailout plans to "buy distressed assets" will be diminished in favor of a "capital infusion program for banks." But what hasn't changed with the $700 billion planning is a basic approach for trickle-down instead of trickle-up.
As the Institute for Policy Studies pointed out on Oct. 1, "A real 'bailout' would target the troubled households of working American families. A $200 billion 'Main Street Stimulus Package' could bolster the real economy and those left vulnerable by the subprime mortgage meltdown."
Components of such a stimulus package could include "a $130 billion annual investment in renewable energy to stimulate good jobs anchored in local economies and reduce our dependency on oil" -- and "a $50 billion outlay to help keep people in foreclosed homes through refinancing and creating new homeownership and housing opportunities" -- and "a $20 billion aid package to states to address the squeeze on state and local government services that declining tax revenues are now forcing." But that kind of discourse for grassroots economic stimulus hasn't gotten into the media storyline this fall.
It's now being revised with quite a bit of backspin. But the media storyline for justifying the Wall Street bailout was great while it lasted. And it lasted long enough to stampede Congress into approving a massive jolt of taxpayer money to redistribute wealth upwards in the United States.