Bailing Out the Reaganites
Would that the Republican contest for the presidential nomination were still going on!
The one point that all the candidates stressed, you will recall, was their fealty to Ronald Reagan's vision. Imagine, then, a debate in which each tried to square his allegiance to Reagan's doctrine of laissez faire with the actions of the Bush administration and the Federal Reserve to bail out Bear Stearns and the entire investment banking sector. The contortions would have been mind-boggling.
Reagan's mission in domestic affairs, we should recall, was to tear down government so that a more laissez faire economy could supplant the economic order built by the New Deal. Today, Republicans in general and John McCain in particular are paying the price for Reagan's success. A largely unregulated financial sector now dominates our economy, while manufacturing, once the keystone of American economic might, has dwindled to distinctly secondary status. As unregulated financial sectors are wont to do, Wall Street embarked on an orgy of speculative investment and debt accumulation, and now its bad investments and overwhelming debt threaten to pull down the entire economy.
American conservatism was in trouble before Wall Street's convulsions. The Bush administration's failure to get a Republican Congress to join its efforts to privatize Social Security during the 2005-06 congressional session revealed the limits of conservatism's push to dismantle government protections. At the very moment employer-provided benefits and pensions were being ratcheted down, the last thing the American people clamored for was an assault on Social Security, too.
And yet, in every Republican debate in this presidential cycle, each candidate tried to claim Reagan's mantle. Now, the task of squaring the Reaganite worldview with the collapse of the Reaganite world under the weight of its own doctrines has fallen squarely on McCain and those Bush administration officials charged with averting an economic catastrophe. It's been no easy chore. Until recently, McCain's economic message consisted chiefly of abolishing congressional earmarks in appropriations bills -- a classic Reaganite proposal that would have no effect on our economic situation. (Earmarks amount to a little more than one-tenth of 1 percent of gross domestic product.)
Forced to confront the prospect of a massive wave of foreclosures and some bank failures that could imperil the whole financial system, the Annapolis grad is plainly at sea. In his speech on the economy last week, he promised to oppose legislation that would bail out home buyers who shouldn't have taken out the loans that the mortgage industry was throwing at them. The next day he semi-corrected himself, saying he was open to proposals that would help "deserving homeowners."
McCain's conflicts are intensified by those of his campaign's general co-chairman and domestic policy adviser, former Texas senator Phil Gramm. The Politico's Lisa Lerer reports that not only did Gramm author the 1999 legislation that repealed Glass-Steagall, the New Deal law restricting the speculative activities of banks, but after Gramm left the Senate, he lobbied Congress on behalf of the Swiss bank UBS when the banking lobby wanted Congress to overturn state laws restricting predatory lending and the issuance of mortgages to prospective home owners who could not afford them. (UBS announced yesterday that it had written down $37 billion in bad mortgage loans over the past six months.) Gramm, Lerer reports, is often a surrogate for McCain in meetings on the economy.
It is not obvious, then, why anyone would turn to McCain's economic team to rein in the excesses of our financial sector. Nor would anyone necessarily turn to former Goldman Sachs co-chairman Henry Paulson, but for the fact that he is Treasury secretary. Paulson's ambivalence toward regulation is amply apparent in his proposals to restructure the government agencies that monitor American finance. If enacted, Paulson's program actually would lead to less government oversight of Wall Street.
In their unwillingness to do what it takes to save the economy, McCain, Paulson & Co. are treading a familiar path. From 1929 through 1932, Andrew Mellon, Herbert Hoover's Treasury secretary and owner of one of America's largest banks, saw no role for the government in helping the economy other than to encourage companies to lay off their employees.
The architects, owners and adherents of a laissez faire economic order have never transformed themselves into economic saviors when the economy they built collapsed. Successfully regulating an economy gone wild has invariably fallen to political leaders who actually believed in regulation.
This is no moment for political leaders who still swear by Ronald Reagan -- John McCain foremost among them. It makes no more sense to put them atop the economy than it does to take a group of pacifists and commission them generals.