The Fearsome Fear of a Looming Recession


In an interview with The Los Angeles Times editorial board last December, Treasury Secretary Henry Paulson made clear that he defined "market failure" as any instance in which investors, including home owners, lost money. In discussing various grand plans to buoy the economy, Paulson said, "What we're doing is avoiding a market failure that would have forced housing values down in a way that was not in the investors' interest, and in a way that the market wasn't intended to work."

You can read more of that exchange here, where it's reprinted in a recent reason column by Tim Cavanaugh. It's a pretty stunning and open admission of how Paulson conceives his job. Basically, his job is to maintain or increase prices, period. He doesn't want to oversee a market that acts as a discovery process because, as Dr. Zaius, the patron saint of all great Platonic experts, could tell you, "You may not like what you find." Indeed, you might find that you misunderestimated what people think your crap is worth (has Paulson, one wonders, ever gone to a garage sale, that ultimate testing ground of the subjective theory of value?).

So Paulson wants to socialize losses by the investing class with his economic PATRIOT Act, a hasty, hurried, and not-clearly-warranted piece of legislation that will somehow manage to change everything without addressing basic incentives in the financial sector (other than underscoring the idea that the American economy is too big to fail, so the feds will oddly bail it out in the name of capitalism).

Given the stunning and uplifting failure of the House to pass the bailout, the Senate will be taking a whack at the pinata tonight, and the bill is likely to pass (so we've been told). Why? Partly because our dear and great leaders have gone out and "sold" the legislation to the American people by now telling us we need to avoid a recession at all costs. As Hillary Clinton has explained (surely in a voice that even Sarah Palin could understand), voters "have to recognize that we are facing a very serious economic slowdown, a recession that could be of long-lasting and deep impact."

So we're doing massive restructuring (read: giving lots of money but not really restructuing basic structures) of the financial markets to avoid a potential recession? Recessions are not easy, but they are periodic events that don't generally call for a bailout plan of this magnitude currently being discussed in Washington. And the old definition of a recession seems up for grabs these days. It used to be that a recession was two or more consecutive quarters of "negative growth" of GDP. These days, it seems to be whenever somebody anywhere is bothered by current conditions.

Look for the price tag of the bailout to keep going up from the admittedly arbitrary $700 billion originally attached to the plan. That's because our leaders are now trying to sell us the plan by offering "sweeteners" that jack up the price and extend the action to all sorts of tangentially related issues (such as alternative energy).

So, a couple of weeks into the worst global crisis since the Japanese bombed Wall Street in 1929, what have we learned?

1. That the secretary of the Treasury has a very weak grasp of the market mechanisms he's messing with.

2. That the fear of a recession, however you want to define it, is enough to throw a heaping load of money at Wall Street.

3. That Congress won't stop believing that the time for a bailout is always yesterday and that the bailout should include more stimulation than a vibrating bed at a hourly-rate motel, all the better to sell it to the American people.

Virtually every member of the New York-Washington axis of power has been pushing the need for a bailout. Which is only one more reason to question it (just watch cable TV, read the Wash Post and New York Times, or watch C-SPAN's surveillance cameras of Congress).

Here's hoping that the Senate finds a spine and votes down the bailout. Or if they pass it, that the House keeps pushing back until the reasons to act in such a decisive manner are clear not just to Hank Paulson, Hillary Clinton, Barack Obama, and John McCain.