Bailout 16: Thoughts on Describing the Problem

As mentioned earlier, I am working on the problem of analyzing the current economic situation in light of biblical and theological concepts related to Jubilee, the Sabbatical year, the denunciation of usury, etc. Below are a few short paragraphs in which I have tried to describe the problems of the economy in order to begin this sort of analysis. Obviously, this is a work in progress.

1. Hard economic times place people and institutions in jeopardy. In 2009, there is plenty of pain to go around. People are losing their homes. Banks are closing. Businesses are failing. Workers are losing jobs. Families are uprooted.

2. Some call the economic woes a credit crisis. Some focus on the housing price bubble. Others emphasize the irresponsibility of financial institutions eager to sell “creative” investment products. Still others highlight the complexity of financial instruments divided, bundled, and resold again and again so that no one is sure who owns what. Many recognize that consumption had outpaced income, and too much of the economy depended on overextended debt. Others criticized the deregulation of financial institutions which allowed them to take inordinate risks with other people’s money.

3. A major part of the problem had to do with a collapse of home prices. Loans had been written with the assumption that housing values would rise steadily and without interruption. Some people borrowed more than they could afford, but others who could afford their mortgages found that they were making payments on a mortgage for an amount that was up to twice the new value of their home. They could not afford to keep paying double for a house that had originally been priced in an inflated market. In a weak economy, workers losing jobs also could no longer meet their mortgage payments.

4. All these mortgage problems led to a crisis of confidence in the mortgage-based securities and the financial institutions investing in them. As the seriousness of the mortgage problems became apparent, the more people became concerned about many other forms of debt, including credit card debt which has grown exponentially. A crash in the stock market followed up the crash in home prices, and many people who had thought they were in good financial shape now saw their pensions, their homes, and their investments lose value dramatically. People losing health insurance coverage were building mountains of debt for medical care.

5. When the economic situation became too severe to avoid, former Treasury Secretary Paulson and Federal Reserve Chair Bernanke recommended a massive bailout of major financial institutions. With only a bare sketch of a plan, the engines of government shifted into high gear to authorize transferring hundreds of billions of dollars directly to banks and other financial institutions to prop up their endangered portfolios of assets.

6. Their idea was to stabilized the financial system by providing cash to banks and other financial institutions who owned securities based on delinquent loans. They said that this would set things in order so that banks would be willing to lend money to grease the wheels of commerce. However, the banks and financial institutions took the money and held it. It did not slow down the pace of foreclosures of mortgages. It did not pump up the economy. Homeowners kept losing their homes with no relief. Credit card companies pressured small borrowers with tightened terms and higher interest rates.

7. What kind of a solution leaves giant banks standing while the average worker’s life gets harder and harder? That is not a solution. It smells like collusion. Whose money bailed out the banks? Who is an economy supposed to benefit? Who says billions can bail out executive jobs but nothing can bail out labor jobs? Who says tax dollars can pay off banks’ bad debts, but the average taxpaying citizens are on their own? Debt relief for millionaires and homelessness for working people—that’s not the kind of economy we believe in.

Bailout 8: Who Needs a Pay Cut?

In discussions of General Motors, Ford, and Chrysler during recent days, many people have sought to name the problem that has brought these automakers into such serious difficulties. Of course, the precipitating events have to do with the decline of wealth among U. S. car buyers because of the drop in home values after the housing bubble deflated. The general economic crisis that includes layoffs and fear of layoffs also led to an unprecedented drop in auto sales.

These immediate and serious causes are part of the picture, but there are other reasons. Many people believe that the next credit crisis will come in consumer debt. People have been living as if they can buy more and more things they can't afford, and lending institutions have allowed it. This is again related to the housing price bubble. If consumer debt got too large, the paper wealth of the ever increasing real estate market was the counterbalance. People could refinance consumer debt with home equity loans. So as credit card debt gets tight, people can't or won't buy a car.

Other people address the environmental and energy-efficiency issues in relation to the Big Three automakers. These companies resisted alternative energy sources, even killing previous progress on electric vehicles. They resisted fuel efficiency standards and majored on building larger gas-guzzler vehicles. Unlike some other automakers, they did not keep up the pace of developing new and better technology for automobiles. They failed to adopt a business model by which they could make strong profits from selling smaller, more efficient cars. When the volatility of gasoline prices struck, driving transportation costs higher and higher, they found themselves stuck with large numbers of vehicles that people were less and less interested in owning.

Among many other reasons given, some people have blamed the automakers' problems on unionized workers. Certainly the benefit plans and retirement plans for these workers are expensive. But most of the attacks on the union workers' wages hid or ignored important facts.

For instance, the highest paid auto workers in the U. S. last year worked for Toyota building Camrys, not for GM. The worker pay differential between companies selling cars in the U. S. is changing. That does not, however, mean that all non-union auto factories in the U. S. are paying comparable wages. It does mean that it is possible to pay high wages, comparable to or greater than the union wages paid to GM workers, and make great profits.

Second, it targets union workers and not other potential candidates for pay cuts in the industry. Who else is getting good pay in the auto industry? Why not cut their pay? As Congressional questioners wondered, why not cut corporate jets for the executives?

Dean Baker makes this point well when he addresses the case of Robert Rubin, an economist who is having a great deal of opportunity to speak about how to solve the current economic crisis. Rubin worked in the Clinton administration, and his allies are being named as Obama advisers. But in January of this year, he said that the economy's struggles would not lead to any serious problems, and certainly no economic meltdown.

Baker points out that Rubin was interim CEO of Citigroup, and that he remains an executive and a director of the corporation that the government bailed out again over the weekend. He was part of the leadership who oversaw the bad loans and the risks of an inflated housing market. Even farther back, he was a central figure in U. S. economic institutions during the dot.com bubble that led to the last recession. Baker asks why with all the hoopla about GM autoworker wages, no one is asking whether Robert Rubin will be taking a pay cut. Who needs a pay cut when corporations are struggling? Why not the executives who helped lead the corporation into their crises?