Do Federal Moves Take Us Back To The New Deal?

It's come to this: One prominent economist now refers to the U.S. as "the United Socialist State Republic of America." And he refers to Treasury Secretary Henry Paulson as "comrade."

It's hyperbole. But many economists aren't happy with all the federal intervention that has been going on lately.

Don Boudreaux, a professor at George Mason University in Virginia, says that the Federal Reserve's $85 billion loan to AIG, which comes in exchange for a huge stake in the company, turns the rules of capitalism upside down.

"The basic tenets of capitalism are that you are free to take whatever risks you want as long as you are willing to bear the costs for those risks," says Boudreaux. "And you get the upside of it too. If you have huge gains, great, you get the gains. But no one helps bail you out or subsidize you."

Boudreaux says the government is now serving as a safety net for a corporate titan that should have known better. And taxpayers are stuck with the risk.

A Bad Precedent?

The Fed's deal with American International Group, the world's largest insurance company, followed a federal bailout of Fannie Mae and Freddie Mac and a government-assisted rescue of the investment bank Bear Stearns.

Boudreaux worries about the precedent. "Other firms either tomorrow or next year are going to suffer problems and there'll be political calls to treat those firms in the same way," he predicts.

There is also an issue of fairness, he says. The government has come to the rescue of a multinational corporation that threatens global finance. But if you're an ordinary citizen, don't count on the same treatment.

Boudreaux says a friend who owns a coffee shop and employs six people wrote to him in jest this morning to pose a question since he, too, is having a tough time: "He was asking me if I thought he could go to Secretary Paulson and ask for a bailout."

Recalling The New Deal

Tyler Cowen, a fellow economist at George Mason, says the last time the federal government intervened like this in the financial sector was during President Franklin Roosevelt's New Deal. And even then, not at this pace.

Cowen decided to look for other examples of similar government action, anywhere on the globe.

"I did some Googling this morning and I tried to learn in what other countries had this happened," he says. "The only example I could find was Ethiopia. Now, when you are sharing your policy space with Ethiopia and no one else, it's not exactly a good sign."

Lawrence Summers, who served as Treasury secretary under President Clinton, says "there are no attractive choices" for resolving this financial crisis. He says the risks were so great that the government had to be bold.

"The thinking here was that by moving to contain the situation, ultimately risks would be reduced," Summers says. "You know, it's very tempting to always think that the government should stand back and let the private sector sort these problems out. That's the kind of thinking that made the Depression great."

The Case For Intervention

The government decided that AIG was so intertwined with the global banking system that a company collapse could have a cascading effect.

Mark Zandi, co-founder of Moody's Economy.com, a research Web site, says that the financial crisis — if unchecked — could slam the broader population.

"What if the Fed and Treasury did not step in aggressively, and in fact they were right?" says Zandi. "Then the impact on the economy, and on jobs, on incomes, on profits and therefore on tax revenue would be even more serious."

He also says the government has an important psychological role to play at times like these.

"The financial markets are built on faith and trust. And there's no way to restore that faith and trust without the help of an aggressive federal government," Zandi says.

Judging from the continued volatility in the stock market, we have a long way to go before that faith is restored.

Comments

 

Please keep your community civil. All comments must follow the NPR.org Community rules and terms of use, and will be moderated prior to posting. NPR reserves the right to use the comments we receive, in whole or in part, and to use the commenter's name and location, in any medium. See also the Terms of Use, Privacy Policy and Community FAQ.