Our economy may be burning, but who lit the fire?

Turn on Fox News, listen to Rush Limbaugh, and you might occasionally get the impression that two companies--Freddie and Fannie--caused the worldwide financial meltdown. It had nothing to do with Citigroup, Wachovia, Washington Mutual, Chase, Merrill Lynch, Morgan Stanley, armies of hedge fund managers and their Ponzi schemes, etc.--it all comes down to Freddie and Fannie, and the interference in private capital by government. It was this defilement which so angered the God of Free Markets and brought about a recession and global financial crisis. The suggestion that poor, lazy masses of people--especially minorities--had some hand in it is not far off.

I know that's not the Old Man's argument. But it is a common conception that has to be got out of the way.

The Old Man does argue in his latest post that the media is dropping the ball. However, it seems to me that much of the media has been very informative--especially the business news.

According to what I have learned from Business Week, the WSJ, the Business Review, and the Financial Times, issues like Freddie, Fannie, and the housing bubble contributed to but did not cause the current worldwide financial meltdown. In fact the current financial bailouts are just the most recent manifestation of a recurring trend over the past few decades that privatizes profits and socializes risk. (Remember S&L?) There are lively debates amongst the experts which I cannot pretend to resolve; however, a strong majority of bankers at the IMF, bank CEOs, regulators, chiefs at the World Bank and Nobel-prize winning economists are saying that there are fundamental problems with our finance and banking system. These problems have to do with business ethics, turning a blind eye to Ponzi schemes like Madoff's, the "too big to fail" problem (which can combine with Ponzi schemes in catastrophic ways), lack of regulation and oversight and systemic risk. The problem is not a bloated, socialist government, it's a government that appoints self-interested bankers and consultants to top positions, and gets elected based on who has a bigger pile of campaign money. In fact one former IMF banker argues that a financial oligarchy has seized the U.S. economy and says most bank CEOs (but not the top five) agree with him.

If you follow the links above, you'll see the business background of my sources. I stress this, so I won't be misunderstood as somehow being anti-business. In fact if you believe in free markets you should definitely be alarmed by financial oligarchies and the control of government by big businesses. I think old-fashioned conservatives like trust-busting Teddy Roosevelt would share this alarm.

There is also a lively debate on what to do now, how to free up credit to avoid total catastrophe. This is not a debate between capitalism vs. socialism. This is a debate businessmen and economists are having amongst themselves on what short-term measures to take in order to save our economy. The Old Man is on one side, arguing that large companies should be allowed to fail, and that stimulus will only increase the national debt. A modest majority seem to be on the other side, arguing that without large public investment and short term government intervention credit will freeze, jobs will be lost and the public debt will be even worse in the long run. Both seem like plausible, consistent positions to me.

What is not plausible or consistent is to argue that the current level of spending and government meddling is unprecedented, that it marks the beginning of authoritarian federal control, or that it is the end of private wealth in this country. The Bush administration rounds people up and holds them without trial for 8 years, spies on our citizens without warrants; yet suddenly our Constitution is in crisis because executives at AIG had some of their federal-bailout bonuses taken away? Please.

Let's talk about "spending". The running costs of our fiasco in Iraq are $12 billion/month (up from 8 in 2003) and $16 billion/month in Afghanistan. (You remember Iraq--that country we were forced to conquer in order to confiscate non-existent WMD and topple the world's sole horrible dictator; and Afghanistan, the one we invaded in order to kill that bearded man who keeps issuing videotapes). Based on conservative estimates by a Nobel-prize winner and former chief economist at the World Bank, the total cost of the Iraq war to the American taxpayer comes to $3 trillion. This is more than all the recent bailouts, stimulus and money-printing combined. Where were fiscal conservatives hiding, month after month, for the past six years? Why weren't they demanding an end to the Bush tax cuts and foreign loans, which deferred the costs of Iraq to the next generation? I won't even go into the social costs. And how about the $500 billion we spend each year on the Defense Department? It is time we asked ourselves why we are the only country on Earth that needs to have BOTH a thermonuclear arsenal capable of destroying the planet, AND conventional forces many times more powerful than the rest of the world's armies combined. Talk about "big government".

Contrast all that spending with the recent $800 billion stimulus package. Here is a handy breakdown on allocations (courtesy Financial Times). The money is being used to upgrade fire departments and health clinics. It's going to big cities for food stamps. It's going to states and schools, unemployment, student loans, tax breaks, construction of highways, needed improvements and construction on federal buildings, the National Science Foundation, and so on. This is not like the utterly wasteful spending on Iraq. This is investment in our country, for once.

Let's talk about the conservative governors. According to the WSJ, South Carolina Gov. Mark Sanford, as well as darlings of the GOP Gov. Sarah Palin (Alaska) and Bobby Jindal (Louisiana), have all made comical shows of protesting some of the federal stimulus money--while accepting most of it. Gov. Sanford accepted more than $2.8 billion in federal stimulus. Now he may refuse to accept an additional $700 million, because there are strings attached. Apparently taxpayers in New York, California, and other states believe the money they give to S. Carolina for education should be used for education. Go figure.

Meanwhile in S. Carolina, where unemployment has reached 11% and pupil spending is 43rd in the nation, conservative residents understand the political game their governor is playing:

"I'm real disappointed in the governor that he's doing what he's doing for political reasons, apparently," said Lexington County Sheriff James Metts, a Republican who echoed the rising indignation among the governor's core base of conservative voters. "We have programs that are being cut, school teachers being cut, jobs being lost by the thousand across the state."

The same sad story is being played out in a few other states with Republican governors, like Texas and Louisiana. Not to worry: the Obama administration recently announced that state governors, not legislatures, can control the money after all, thus averting those governors' possible rejection of stimulus money. Low-income conservatives in southern and midwestern states can thank Obama later.