A new era of big government

Steven Pearlstein discusses the new takeover of the economy by the federal government, drawing the inevitable political conclusion:

It would be hard to find a superlative that would overstate how much the parameters and contours of American economic policy have been reshaped over the past two weeks.

The degree of government intervention into the workings of the private marketplace is unprecedented. Three giant financial institutions taken over. Government purchases of vast quantities of hard-to-sell assets from banks, investment banks and anyone else whose demise might threaten the financial system. Trading outlawed in an entire class of securities. A government guarantee extended to a whole new category of investments.

Laws have been stretched until they are barely recognizable. . . .

But in terms of the political economy, there is little doubt we are witnessing a once-in-a-generation sea change. It will no longer be an easy applause line for a politician to declare that government is the problem and that markets always know better than regulators and politicians. With Bear Stearns and AIG as their rallying cry, citizens will demand the same kind of financial security and protection as bondholders of big banks and counter-parties of hedge funds. Debates about the competitiveness of U.S. financial markets will focus less on how little regulated they are and more on how much protection and transparency they offer to investors. It will be harder to deny essential government agencies the talent, money and respect they need to do the job right.

An interesting comparison can be made between Hurricane Katrina and the current financial crisis, which symbolically has now stranded a number of rich investors on the roofs of their mansions, crying out to the government to be rescued.

When we look back, we may find that this crisis, like Katrina, was a turning point in public perceptions and expectations of government — about its competence in dealing with the inevitable crises that occur and its ability to take steps ahead of time to assure that the damage is limited and the most vulnerable are protected.

Uh, so we want the government that did such a good job handling Hurricane Katrina to handle the entire economic storm? That does not bode well. The point, though, is that big government is back in vogue.

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  • You know, I have to tell you, I really enjoy this blog and the insight from everyone who participates. I find it to be refreshing and very informative. I wish there were more blogs like it. Anyway, I felt it was about time I posted, I’ve spent most of my time here just lurking and reading, but today for some reason I just felt compelled to say this.

  • Mary Ann

    I voted for George Bush, but I have to wonder where he was instead of attending his Economics classes in college. He has increased government spending enormously over the last 7+ years, and now this. I would like to know when somebody is going to call for a special prosecutor, or Congressional hearings to put the CEO’s of these companies on the hot seat?

  • Susan aka organshoes

    Proves we’re not interested in what works or even in what’s best. We want what won’t hurt. We think.
    To quote Dan Rather: ‘Courage.’
    It’s located exactly where?

  • fw

    I am not so sure that big government is back in vogue.

    these things are happening now because we were persuaded that government regulation = big government.

    in fact it looks now like it would have looked like The Rule of Law, the main function of a good government.

    Sometimes there is a false choice presented.

    The idea of small less intrusive government is not always the enemy of the idea of a well functioning government. Government can be a force for good. If this is not true , then “we the people” can not be a force for good since in our country the people own the govt and not vica versa.

    BUT the people do NOT govern. I see alot of conservatives here confused on this.

    Our government ideally is where the people are ruled by law and not by men. This is the core concept of republican, constitutional government.

    This is a core concept of our american experiment that is easily lost. I appreciate this ideal immensely living now in Brasil. We need leaders who constantly build on this foundation.

    We talk about obama and palin and McCain and their likability. or character. how silly. we are not electing a talk show host.

    Maybe instead we should pay attention to evidence that they have considered deeply the rule of law, that they consciously feel their elected office MUST be constrained by law, that “due process” must be followed expecially by our leaders. that our leaders must set an example of lawFULLness. not cut corners ever for expediency.

    I think Bush senior was the last president that we had that truly appreciated this. Before him I think of Jimmy carter and gerald ford and their administrations.

    None of these men are eulogized as other presidents are. Maybe that means something good about them.

    I would like to see men and women in politics to look to strengthen rule of law. this does not mean more regulation per se or intrusion. It does mean OBEYING laws, the tedious t crossing and i dotting, and then changing laws that don´t make sense rather than simply ignoring them or looking for the loophole.

  • fw

    here is an excellent article in layman´s language about all this.


  • Don S

    It’s becoming clearer and clearer that this whole mess has its roots in excesses created by Fannie Mae and Freddie Mac, and their decisions to purchase, re-package, and sell as securities bundles of subprime mortgages. There was an anti-discrimination policy in effect that was driving this approach, namely, to ensure that all Americans, regardless of economic circumstances, had the opportunity of home ownership. Initially, the availability of this kind of zero down, low teaser starter-rate financing drove the real estate market upwards at unsustainable rates, because of too much money chasing too few properties. Ultimately, of course, the market started to correct, and because there was no actual equity held by the owners of many properties, and couldn’t make the mortage payments after the rates ratcheted upwards from teaser levels, many owners had no incentive to try to stay in their homes.

    So now, what to do? One of the policy incentives right now is to try to stop the downfall in the housing market. I think this is a mistake. We need to let the correction cycle take its full effect, and restore a historical norm between home prices and incomes. In the meantime, in exchange for any “bail-out” dollars we are willing to put into the marketplace, we need to get back to the concept of 20% down payments on mortgages, with either fixed rates or capped ARM’s with market start rates. This policy change will stabilize the market in both directions, as folks with equity in their homes and not facing the prospect of sharply increasing interest rates will have motivation to ride out downturns and stay in their homes, thus reducing properties on the market when prices are declining. On the other hand, if you have to qualify for a home at market interest rates and supply a 20% down payment, prices will be unable to rise much above income rate increases, as was the case for most of our history. We will need to understand, as a society, that not everyone can or should be a homeowner. It is a huge economic responsiblity and needs to be only for those that are prepared to take that on.

    Obviously, there will be short term pain, as there already has been, and in exchange for restoring the above good sense policies, which will benefit us in the long term, our bail-out funds can be directed toward stabilizing things so that the effects on those who were caught up in the crazy policies of the past number of years are somewhat limited.

  • Peter Leavitt

    Actually, going back to Alexander Hamilton the federal government has stepped in to stabilize the economy in the face of a financial panic, usually brought about by the collapse of some financial excess; In Hamilton’s day it had to do with federal Treasury bonds; just now it is the housing market. In the early days of the Great Depression the Federal government neglected to step in to help, which led to over 7,000 bank failures and much financial pain for Americans of all classes.

    Paulson and Bernanke well understand that this bailout, like the S&L bailout, will be a temporary measure and in the long run private enterprise will still be dominant in our economy. People need to take a deep breath and get some perspective on this crisis.

    As to catastrophic events like Katrina, the feds do have some resources that that can effectively help, as do local and state agencies and charities, especiaally religious ones. However, local officials that rely on the feds to do the main job are making a big mistake.

  • Bruce

    FW#5: the linked article you referenced seems very good and clear. Maybe we make it out of this mess. What your writer makes clear is that at some point down the road it is absolutely essential that these companies become denationalized. How do you see that playing out? Isn’t there some truism, to wit: “Once nationalized, forever nationalized”?

  • Susan aka organshoes

    Don S referred to ‘the crazy policies of the past number of years’
    Is it safe then to assume then that the era of ‘crazy [financial] policies’ is over?
    That would seem to be a big rub to me: that maybe one craziness has been supplanted with another.

  • fw

    as i understand, the price of a home doubled in the last 8 years or so, and incomes of course, did not keep pace.

    what will probably need to happen is for housing prices to again reflect the multiple of average incomes that has been pretty consistent in history.

    the middle class, if defined by the american dream of being able to own a home, has now basically be wiped out in the past 8 years.

  • Don S

    Susan @ 9: No, unfortunately, I am not at all sure the crazy policies of the past number of years are over. My proposal is that, if there is to be a bail-out, it be accompanied by legislation forbidding those crazy policies. For example, any government-affiliated institution (e.g. Fannie & Freddie, and any others in which the government has an ownership interest) would be forbidden from buying or selling mortgages initiated at teaser rates or on the basis of less than a 20% down payment. Securities comprising re-packaged subprime mortgages could also be prohibited from securities markets.

  • Bruce

    “the middle class, if defined by the american dream of being able to own a home, has now basically be wiped out in the past 8 years.”

    Curious you would use that time frame. You could just have easily said “the last two weeks” or “the last twenty years”. It is hard, with so much blame to go around and in the silly season of politics we’re in, to keep politics out of it, isn’t it Frank?

    The dream of the middle class probably, long term, hasn’t been wiped out. There will still be plenty of hard working, sensible people who will continue to save their money and put down sensible down payments on properly computed mortgages. The willingness to loan to people who can’t pay their mortgages, creating a pile of paper mortgages that can then be toyed with by barbarians in Brooks Brothers suits (or whatever they’re wearing these days–Levy’s?) has got to end, though. I’m willing to lay plenty of blame at the feet of the Bush admin. But let the Dems in Congress toe their lines as well. There were efforts to fix Fannie and Freddy over the years, but politics intervened. This perfect storm of a meltdown didn’t come out of a vacuum, did it?

  • Anon

    I’m inclined to think that G. W. Bush is an example of the Peter Principle, where one is promoted above their competence. He seems a genuinely decent person, and a good one to work for, according to his former employees back in Texas. As to the spending, there is this thing called the war, that always increases spending, especially when the previous president deplehted our munitions on Iraq, Bosnia, and Somalia without replenishing them, that isn’t the same as driving up entitlements many-fold.

    The war seems to have distracted the administration from repairing the damages done by two administrations of the Clintons, as well as being blocked these past two years by the Democrat Congress. McCain tried to prevent this crisis, but people like Biden and Obama blocked him.

  • Oh, Anon (@13), you! Ah, everything is the fault of Clinton or whatever the latest Democratically controlled Congress is! Never mind that, even if we accept this argument, it then becomes rankest foolishness for Bush to have gone into Iraq with such “deplehted” munitions.

    McCain tried to prevent this crisis? What, by supporting deregulation?

  • Anon

    I provided citations for those statements late last week, tODD. You grow tiresome in repeating disproven statements and answered questions.

  • fw

    #12 bruce.

    I was trying to buy a home in los angeles for the past 12 years. yes it was during the last 8 years that home prices doubled. that was not meant as a political statement about the bush presidency.

    in the los angeles area it is simply a fact to recon with. it is a silent and major transition for the country. I am really surprised that no one is talking about it.

    when I was growing up the assumtion was that ones children would enjoy a higher living standard than their parents. that seems to be so not true today. when did that change come about?

    I am really not sure, and sincerely, on this last question, am not sure. but it has happened. i would be interested in hearing from anyone as to when that change happened. when exactly it was that ones children would not be expected to have a higher standard of living…. if it is possible to pin something that effemeral down in fact.

    but the fact does appear to be rather indisputable anecdotally. or am i wrong?

  • Anon (@15), I respond to your (and others’) posts when I have something to add or when there is something that needs correcting.

    You seem to respond to me mainly to tell me that you don’t like responding to me, or to dismiss me.

    My question, as to the latter behaviors, is: why?

  • fw

    The subprime meltdown was caused by investment brokerages who were left free to do what they wanted with Bush appointed business cronies in the SEC. They pushed out money to be loaned by any means necessary – including no money down, no proof of employment, no credit check, all you need is a pulse. Why the high demand? A form of financial engineering called securitization, which allowed many mortgage lenders to pass the rights to the mortgage payments and related credit/default risk to third-party investors via mortgage-backed securities (MBS) and collateralized debt obligations (CDO). Corporate, individual and institutional investors holding MBS or CDO now face significant losses, as the value of the underlying mortgage assets decline. Does this sound like a something Obama did?

    How did this happen?

    Economist Robert Kuttner has criticized the repeal of the Glass-Steagall Act as contributing to the subprime meltdown.

    1. This act had since 1933 eliminated Conflicts of interest characterize the granting of credit – lending – and the use of credit – investing – by the same entity, which led to abuses in 1933 (Great Depression remember?).

    2. Depository institutions possess enormous financial power, by virtue of their control of other people’s money; its extent was limited by the act to ensure soundness and competition in the market for funds, whether loans or investments.

    3. The act kept banks out of the securities business. Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.

    4. The act made sure deposits and liabilities did not get out of balance. Depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to operate prudently in more speculative securities businesses. An example is the crash of real estate investment trusts sponsored by bank holding companies (in the 1970s and 1980s).

    Why was it repealed by the Republican Congress in 1999? So it could be replaced by the Gramm-Leach-Bliley Act, also known as the Gramm-Leach-Bliley Financial Services Modernization Act, which allowed banks and insurance companies to do it all, investments – grant credit – lend – and use credit; which led to abuses and the fix we’re in today.

    Who led this charge of Deregulation? Gramm? That’s right, Phil Gramm: Mr. “nation of whiners” who is still advising McCain on economic matters.

    Senate Democrats Voted Against it 39 to 1

    Senate Republicans voted it for it 44 to 1

    McCain’s vote on Gramm’s bill – Yea.


  • fw

    bush again uses a crisis to put all power into the hands of the executive branch with no oversight and out of reach of any court of law.

    rule of law again disregarded (the first time was using sept 11 to eliminate constitutional due process in certain situations)

    A critical – and radical – component of the bailout package proposed by the Bush administration has thus far failed to garner the serious attention of anyone in the press. Section 8 (which ironically reminds one of the popular name of the portion of the 1937 Housing Act that paved the way for subsidized affordable housing ) of this legislation is just a single sentence of thirty-two words, but it represents a significant consolidation of power and an abdication of oversight authority that’s so flat-out astounding that it ought to set one’s hair on fire. It reads, in its entirety:

    Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
    In short, the so-called “mother of all bailouts,” which will transfer $700 billion taxpayer dollars to purchase the distressed assets of several failed financial institutions, will be conducted in a manner unchallengeable by courts and ungovernable by the People’s duly sworn representatives. All decision-making power will be consolidated into the Executive Branch – who, we remind you, will have the incentive to act upon this privilege as quickly as possible, before they leave office. The measure will run up the budget deficit by a significant amount, with no guarantee of recouping the outlay, and no fundamental means of holding those who fail to do so accountable.

  • fw

    will you all want what bush is pushing for in the event that obama becomes president and the democrats are in control?

    do we want rules and laws that depend on us trusting the integrity of those who wield them?

    do we want to be ruled by (1) the rule of law or (2) by men?

    so far it seems bush and most of you conservatives here would select (2).


  • fw


    lenders offering interest only mortgages and no down mortgages are what directly fueled the doubling of home prices. incomes did not double during that time. so in the past 8 years home ownership has become out of reach for median incomers.

    this is a rather dramatic event and so isnt it odd that no one seems to have noticed?

  • fw


    what changed everything was the gramm act of 1999. so, ok. 10 years not 8, but it was only in the last 8 years that home prices doubled. actually from 1999 to 2006

  • Peter Leavitt

    fw: The subprime meltdown was caused by investment brokerages who were left free to do what they wanted with Bush appointed business cronies in the SEC

    There were two main reasons for this meltdown.

    First, the Fed, mostly during 2003-4, lowered interest rates drastically to keep the economy stabilized after the DotCom bust. Traders used short-term borrowings to heavily leverage into mortgage- backed securities. A large factor in all economic panics, manias, and crashes is available easy money

    Second, the government, startting withCarter and on steroids with Clinton, compromised through Fannie and Freddie Mae the credit standards for mortgage lending in the interests of providing mortgage to poor people, especially the minorities. Bush with MsCain’s strong support tried to reform Fan and Fred in 2002 and 2004 but were blocked by the Democrats, mainly Frank, Pelosi, and Dodd along with some spineless Republicans, allof whom received substantial financial contributions from Fan and Fred.

    Blaming this meltdown on Bush is to reveal both a mean spirit and a lack of reality.

  • Peter Leavitt

    fw, as to the Gramm act it had nothing to with the subprime meltdown. Its purpose had to do with allowing commercial banks to do investment banking with a firewall between the regular commercial accounts and the investment products divisions.

    This act actually is helping to solve the present financial crisis in that it alowed Merrill Lynch to be taken over by Bank of America. At present both the Morgan Stanley and Goldman-Sachs investment banks have morphed into bank-holding companies which are more tightly regulated according to the terms of the Gramm legislation.

    I’m afraid you let your political passion interfere with your judgment on financial matters.

  • Don S

    Frank, starting at 18 and continuing in that Frank way of yours: Peter has very eloquently refuted your partisan attempts to lay all of this current crisis on Republicans. Glass-Stegall had nothing to do with this, as Peter already stated. Moreover, Clinton signed that bill, so enough with your Daily Kos talking points about it being all Republican. If Clinton had vetoed that bill, it could not have been overridden.

    The real perpetrators in this madness were Freddie and Fannie, and their insistence on securitizing garbage subprime loans to create a market for them for the purpose of expanding housing opportunities to those who had no business owning homes. This has already been thoroughly discussed on this site and elsewhere, but you keep spouting your same points. You say you are an accountant, you should be able to grasp this stuff better than you have been evidencing. Once the housing market overheated, thanks to the availability of easy credit, there were the usual excesses as people sought easy appreciation in any way possible, but it all started with the creation of a market for these no-down no doc (liar) loans.

  • Anon

    What if we were to take cues from the Bible: eliminate the usurious interest rates on mortages (and other loans). What would that do to the economy short-term, mid-range and long-term?

    What would that do to families?

    What would that do to banks?

    What would that do to human happiness?

  • Anon

    Another thing to look at would be the Sabbath year laws and the Jubilee.

  • Peter (@23), even if we assume that — conveniently, no doubt — it was only the fault of, let’s see: Carter, Clinton, and the poor, “especially the minorities” (Classy! Those wily minorities are always ruining us white folks’ economy!) who are to blame, not Bush, and certainly not The Maverick(tm) …

    Even if we assume all that, there is this odd fact that McCain’s campaign manager (Rick Davis) was paid handsomely by Fannie and Freddie to defend them against stricter regulations, and not only that, he championed an increase in minority homeownership!

    From the New York Times article “Loan Titans Paid McCain Adviser Nearly $2 Million” on 9/21/08:

    “The value that he brought to the relationship was the closeness to Senator McCain and the possibility that Senator McCain was going to run for president again,” said Robert McCarson, a former spokesman for Fannie Mae, who said that while he worked there from 2000 to 2002, Fannie Mae and Freddie Mac together paid Mr. Davis’s firm $35,000 a month.

    From Mr. Davis’s Homeownership Alliance’s 2004 annual report:

    “We have an opportunity in the next decade to increase minority homeownership and significantly reduce the minority homeownership gap,” Davis is quoted saying here. “The future of the housing market rests heavily on the economic success of minorities. Homeownership is likely to grow faster among minority Americans in the next decade if all the stakeholders in the housing industry work together to make it happen. The Homeownership Alliance is working toward this goal,” said Davis.

    Is Obama clean in all this Fannie/Freddie stuff? Of course not. But the conveniently partisan picture you paint is risible.

  • Don S

    Frank, here is a Washington Post article, from today, in pertinent part:

    “McCain said Obama had ‘declined to put forth a plan’ to deal with the Wall Street meltdown, an assertion that is exaggerated at best. Obama said McCain “has fought time and time again against the common-sense rules of the road that could’ve prevented this crisis,” neglecting to mention that his new brain trust on the crisis includes two Clinton administration Treasury secretaries, Robert E. Rubin and Lawrence H. Summers, who helped negotiate the deregulation of the financial services industries in 1999.

    In an interview on Friday, Rubin said the law, named after its now-retired congressional sponsors — Phil Gramm (Tex.), a top McCain economic adviser; Jim Leach (Iowa), who heads Republicans for Obama; and Thomas J. Bliley Jr. (Va.) — “had no impact, zero,” on the current crisis. ”

    The link to the whole article is: http://www.washingtonpost.com/wp-dyn/content/article/2008/09/22/AR2008092203179.html?sid=ST2008092203257&s_pos=

    So, Robert Rubin completely disagrees with your assertion regarding the 1999 act that you keep referencing as the source of all of our current troubles.

    Personally, I think the party that tries to make this a partisan issue for short-term electoral gain is the party that is more likely to lose the election. Folks don’t want to hear partisan sniping right now — they want thoughtful and cooperative solutions.

  • Peter Leavitt

    todd, Davis is vulnerable on the Fannie Mae issue but not McCain. If you want to play the game of corrupt lobbyist advisers, one could easily bring up Raines and Johnson, the Obama advisers who were canned from Fannie Mae for corrupt accounting practices that benefitted them personally.

    In 2003 and 2004 both Bush, with the strong support of McCain, attempted a major reform of Fannie Mae that was defeated mainly by Democrats along with a few spineless Republicans.

    Fortunately, just now the Bush administration, spearheaded by the able Paulson and Bernanke, bids fair to push through a bi-partisan bailout plan that will deal with the root of the problem. Both McCain and Obama are basically aboard with the plan, and as Don S remarks, aware that this is not the time to play partisan politics.

  • Peter (@30), you seem to think that who McCain selects as his advisers is immaterial to his qualities as potential President; I disagree. It likely gives us a good idea of how he will govern — after all, he will be selecting Cabinet members in a not-dissimilar fashion. If he picks people to advise him now who hold such contrary views to what you think is important, contrary to what you see in him, what makes you think he will do any different when in office. In short, I believe both Obama and McCain should be viewed, in part, in light of their advisers. You seem to think only Obama should be.

    Also, I am unaware of the Fannie reform that Bush and McCain championed. Can you give me a bill name or something else to search for?

    Finally, “this is not the time to play partisan politics” sounds suspiciously like “this is the time to do what Bush wants”. The last time I heard that, it was just before we entered into a long, costly, foolish war.

  • Don S

    Peter @ 30 & tODD @ 31: Just to clarify my comment on partisan politics, let me say that I am not advocating that we do not carefully vet this bail-out plan, or that we just “do what Bush wants”. I have my own doubts about the plan as proposed, though I recognize the dire circumstances we are apparently in, and the potential for true hardship if decisive action of some sort isn’t taken. My only point was that playing the “blame game” is not something we should be engaging in. There is plenty of blame to spread through both parties, and recriminations over those issues are not going to benefit anyone, nor are they going to promote clear thinking bipartisanship concerning potential solutions.

  • Anon

    Citations for McCain’s attempt to reform the mortgage situation has been posted in the last few days.