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Kuttner: Bush’s Financial Rescue (Non-)Strategy

Robert Kuttner, our favorite no-nonsense economic expert and author of Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency, has an Op-Ed in today’s Boston Globe.

He warns that the current financial crisis facing this country calls for “combined government recapitalization with tough regulation,” similar to what Franklin Roosevelt did in the 1930s.

“But,” he continues, “the government-loathing Bush administration has pumped in capital only in fits and starts, and remains allergic to regulation.”

Good luck, Economy!

Bush’s treasury secretary, Henry Paulson, former CEO of Goldman Sachs, went to Washington in 2006 with a blueprint for even less government involvement with Wall Street, not more. In the improbable role of emergency government financial czar, Paulson ran the rescues in the manner of a private investment banker. He viewed each collapse as an occasion for a merger, acquisition, or restructuring. Flying without a regulatory compass, Paulson and Federal Reserve Chairman Ben Bernanke extended taxpayer money and lines of credit from the Fed to get through each crisis of the day.

Their strategy was to find white knights and erect firewalls. If Bear Stearns could be saved from bankruptcy by a shotgun merger with JPMorgan Chase, then all of Bear’s creditors on Wall Street would not take a hit. If Fannie Mae and Freddie Mac could be rescued with $200 billion of taxpayer money, maybe the mortgage crisis would not deepen. If the Fed could advance enough credit to brokerages and investment bankers that were not even part of the Fed system, maybe it would buy time to clean up their balance sheets.

The strategy boiled down to allowing Wall Street to privatize the gains while government socialized the losses. After the fact – after more than a decade of letting Wall Street operate like a casino – the government had little choice: If a sufficiently large bank went bust, it could take the whole system down with it.

Read the whole article here.


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