Politics and business are full of convenient myths and useful fictions—that democratic government is driven primarily by the will of the people, for instance. Deep down we suspect these things aren’t exactly true, but they help keep the system moving.
These little delusions have their uses, but there are times when it’s important to focus on cold, hard truths. And when public officials decide they are going to spend close to a trillion dollars of taxpayer money to rescue a slew of private financial institutions from their own foolhardy misadventures, it’s time to cut the bull. Last week, the U.S. Congress approved Henry Paulson’s controversial US$700-billion bailout plan, after the House initially rejected it just four days earlier. How did they manage that abrupt about-face? In part, they did it by offering a handful of handy myths, designed to make Main Street feel better about funding a gargantuan economic do-over for the titans of Wall Street.
The first of these myths revolves around the idea that the plan will save the economy from the deep and painful recession lurking around the corner. For the average person on the street, this is the whole point of the Paulson plan, but even a cursory glance at the most recent economic data blows this hopeful idea sky-high. On the very day that the House of Representatives was ratifying the bailout, the U.S. Labour Department reported that 159,000 Americans lost their jobs in September—the worst one-month plunge in more than five years. That brought total job losses in the U.S. to 760,000 so far this year. The “official” unemployment rate is holding steady at 6.1 per cent, but that doesn’t really tell the whole sad story. When you include people who have given up actively looking for a job (known in government jargon as “discouraged workers”), unemployment now stands at 11 per cent—the highest since 1994. U.S. manufacturing activity slipped in September to its lowest level since the month after the 9/11 terrorist attacks. Josh Shapiro, an economist for MFR Inc. in New York, broke the bad news in a note to clients on Friday: “A consumer-led recession is upon us, and it promises to be a serious one.”
Pulling out of this funk won’t begin until people get confident enough to start buying houses again. Even if Paulson’s bailout can clear the decks for banks to restart lending, there will be precious few people eager to make a big investment when the economy is in the tank. The more people lose their jobs, the more foreclosures we will see, and the more prices are likely to fall. As of July, house prices in 20 major U.S. markets had fallen 16.3 per cent in a year and are still dropping, amid a record number of foreclosures.
Well, even if it can’t save America from a recession that’s already begun, proponents of the rescue say at least it will strike a major blow against the greed and excesses of Wall Street. They point to the bill’s prohibition on fat executive severance deals as proof. This too is a fantasy. The bill only prevents new golden parachutes for executives at companies taking part in the bailout. Washington can’t go back and abrogate existing employment contracts, so executives who already have their deals inked (which they all do) will still walk away with millions whenever they choose to quit, retire or get fired.
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