As a response to the financial crisis, the Bush Administration's Troubled Asset Recovery Program (TARP) was woefully inadequate. But its implementation brought to a close a nearly thirty year period during which market deregulation was the touchstone of economic policy. Now, market fundamentalism is dead. As a result of the economic free-fall we are experiencing, the question being asked is whether the government's involvement in the economy is adequately focused or large enough, not whether it should be undertaken at all. Governmental intervention is the new flavor of the month.
But as important as this shift is, it masks an even more important continuity. To obtain office, elected officials still require the financial support of the country's economic elite. In the past, these contributors had the goal of ensuring that their businesses were left alone to pursue their private interests. Now the tide has turned and their viability requires government assistance.
The central actor in this flip-flop has been Wall Street. The financial sector used its campaign contributions to advance economic deregulation. Today, Wall Street continues to be the single most important source of political donations and therefore influence. But now it lobbies for bail-outs, not self-reliance.
Despite the bailouts however, the economic crisis has continued to intensify. This is largely because the financial sector remains dysfunctional. This problem must be solved so that credit can start to flow again. The most straight-forward way to accomplish this objective - an approach the Obama Administration resists - is to nationalize insolvent banks, reorganize them, and then sell them to new owners. Doing so would create a fresh start. And while such an approach obviously would be costly to the government, it would create banks with sound balance sheets and also avoid rewarding those responsible for the present fiasco.
The financial sector vehemently opposes nationalization. To date it has gotten its way. Instead of taking over giant but weak banks, the Obama Administration has chosen instead to provide them with funds in the hope that massive injections of money will rejuvenate them. It is unclear whether this approach - unsuccessful at the moment - will ever work. But what is not in doubt is that the political system still is providing the big campaign funders with their policy preferences.
In this context, the need to reduce the political clout of the financial sector and democratize the political funding system takes on an urgency that can hardly be exaggerated. Clean elections - the public funding of electoral campaigns - have long been thought of as a "good government" process issue. The tendency has been to relegate to it to the political back-burner, especially in a time of crisis. No longer. It now has to be thought of as our best available means to work our way out of the economic debacle.
What is clear is that we need to engage in a wide-ranging and difficult political debate concerning our economic future. The market failures that confront us are the worst that we have seen since the Great Depression. If nationalizing banks or its functional equivalent is to occur, the terms of our political discussions must not be biased by any individual sector, and particularly not by a self-interested financial community.
Nationalizing failed banks will not be an easy sell. The country has had a long romance with markets and the residue of that infatuation persists among significant segments of the population. Such a scheme will evoke a conditioned response of hostility. But dire economic circumstances may well erode that opposition. No one knew before the 1930s that a New Deal would be acceptable to - even desired by - the American people. The 1920s after all, like our current period, was a period of retreat from the progressive reforms of the early decades of the century. It is very likely that today's conventional wisdom too concerning the limits of policy initiatives will be radically altered as the economy continues to fail.
The danger here is that a failure to accept nationalization, joined with a protracted continuation of the current bail-out strategy, risks producing a counter-productive populism. The threat is that taxpayers will rebel against seeing their money thrown into a financial black-hole that produces little or no positive economic response. If such a rebellion occurred, it is at least possible that an atavistic anger could impede the search for financial viability and might even end up with a return to some form of market fundamentalism. After all, if the government botches the job, what choice is there?
As presently structured, our political system is ill-equipped to deal effectively with the economic crisis. To date, the Obama Administration's response to it all too clearly reflects the limited range of options that political funders will tolerate. Widening the policy alternatives requires that wealth no longer dictate the political agenda. Public funding of electoral campaigns - especially at the Congressional level - is critical in order to allow us to grapple effectively with the economic crisis.