Saturday, September 20, 2008

Some Thoughts on the Bailout

While I understand and appreciate that the consequences of not acting would be severe since our globalized economy is so interdependent on various sectors working together in unison, I foresee the bailout as being a divisive issue in the future that could cast America into a new era of class warfare and partisanship.

Thus far most of the rhetoric around the bailout has focused on saving big business. The administration is being very careful to parse this plan in terms of averting worldwide economic ruin. What we've yet to hear is what happens to the mortgages once the government assumes responsibility for them? Will the US government take a populist stance and offer debt forgiveness to those teetering on the brink of foreclosure? Will they retroactively grant some kind of relief to those who have already foreclosed? There has been no talk of what the government intends to do in the long term to get this debt back. Only the short term solution of issuing bonds likely to be sold to foreign investors to cover the debt has been proffered.

If the government indeed rescues these corporations and turns around and grants signficant deferrals or outright forgiveness, the debt will disappear into a black hole while taxpayers spend the next several decades increasing the coffers of foreign banks and governments. If only the investment giants are spared while homes continue to be foreclosed, then the citizenry will have incurred all of the punitive damages, in terms of both the tax burden and the loss of critical assets. And what will become of the seized assets? Will the government use its new position as the primary real estate magnate to regulate the speculative housing market? If so, for how long?

It remains uncertain whether the lenders or consumers will pay the higher price for their mistakes, but taxpayers are sure to shoulder the greatest burden. A burden that will likely lead to increased resentment of big business, government and one's less fortunate neighbor. The Foreclosed could easily become the neo-lepers of our society as the economy comes to a stall and no answers are in sight. Meanwhile hot button issues such as immigration and trade agreements will become fodder for pundits as there will overall be a lot less opportunity and space to go around.

The details of the bailout will crystallize in the coming weeks. It will be up to Congress to ask the difficult questions about debt forgiveness and bond issuance. Compromises will be made and someone will lose. That someone will be the taxpayers who can do nothing as the value of their homes diminish and they assume the debts of irresponsible borrowers and lenders. Debts that will be in the hands of nations to whom we will be beholden in our execution of foreign policy in the coming years. Meanwhile, the executive branch has benefited from yet another nearly unprecedented expansion of power in its eight year span.

Where one stood on the bailout will doubtless become the central issue of the 2012 Presidential Election, just as the war in Iraq defined the 2004 and 2008 elections.2008 will likely supplant 2001 as the seminal moment in twenty-first century American history, though few will fully understand why. It will be up to our great grandchildren to decide whether this was the dawn of our fall or the presently unforeseeable transitional period to a new era of fiscal and social responsibility.