All Americans are waiting and watching anxiously for presentation of the full details of the Federal Reserve/Treasury/regulatory agency package intended to stabilize financial markets and keep the real economy from plunging into deep recession. Congress, remember, must review the whole thing and may add some items of its own — no doubt making the package even more expensive than its intially estimated $700 billion-$1 trillion cost. Final congressional action can be expected toward the end of the coming week.
This action represents the largest expansion of federal power into financial markets/the economy since the Great Depression. This power, once expanded, is not likely to be withdrawn. For good or ill, the federal government (and, in turn, state governments and regulators) from this point forward will be as involved here as, for instance, European Union governments, central bankers, and regulators are involved in comparable decisions there. The present financial crisis has transformed, on the watch of a Republican president and Treasury Secretary, government's role in American financial and economic activity on a scale which even the most leftward-leaning theorists would not have proposed only a month ago.
The package itself, as presently discussed, appears to be a bailout of big-time risk takers and speculators at the expensive of ordinary, working taxpayers. In the frequently used phrase, we are privatizing profit and socializing loss. Yet, in the present situation, alternative options are not really available. If you worked, saved, paid your taxes, bought a home you could afford, and kept your family's risk to a minimum, you will pay now for the mistakes made by the guys who got multimillion-dollar bonuses (and exit packages) while playing Monopoly with ordinary investors' money.
With luck, taxpayers will recoup some of the money to be derived from assets formerly owned by financial houses but now to be owned by taxpayers. Most likely, these assets will be auctioned and bring pennies-on-the-dollar prices. Others will be held and, in time, sold at varying discounts. But a don't-worry, we'll-get-the-money-back attitude is not justified.
Last Friday's market rally should not be mistaken for a longer-term trend. Markets reacted favorably to what they saw as strong action being taken by the Treasury and Fed, in particular. But, no doubt about it, more financial consolidations and bankruptcies lie not far down the road. Washington Mutual, for one, is likely to be sold or go bankrupt before the end of the month.
Meanwhile, the real economy has not yet felt the effects of what will be a general credit squeeze in the wake of this financial bailout. Lending standards will be tightened; so will capital requirements of financial institutions. Real GDP will lose a point or more from projections of only a month ago. If you think of recovery, think long and slow.
During all this turmoil in the past week, our national political candidates have not looked good. Both they and their media campaigns have been too greatly negative toward each other. Sens. Barack Obama and John McCain, and their running mates, clearly have been making it up as they go along, but watch for their more considered responses in the week ahead. Voters are looking for serious, knowledgeable leadership right now. They are ready to shift to whichever candidate and party seems most likely to provide it.
The emergency proposals have only halted the crisis in place. Now they will get congressional and other vetting. Ordinary citizens, who never gave economic/financial policy a thought, will be getting crash courses the hard way.