Many people on both the right and the left are outraged at the idea of using taxpayer money to bail out America’s financial system. They’re right to be outraged, but doing nothing isn’t a serious option. Right now, players throughout the system are refusing to lend and hoarding cash — and this collapse of credit reminds many economists of the run on the banks that brought on the Great Depression.
However, is the choice really between doing nothing and swift Government action? As I wrote on Wednesday, the Panic of 1907 was alleviated, at least in part, because J. P. Morgan did not hoard cash and persuaded others as well-endowed as he was to follow his lead. Similar activities were observed on Wednesday, the closest to home being Warren Buffet's injection of $5 billion into Goldman Sachs. Since that announcement I have not heard any news about the Berkshire Hathaway faithful rushing to unload their shares. Now we have a report from Norma Cohen, Economic Correspondent for the Financial Times, that the Bank of England is making a similar move:
The Bank of England said it would extend $30bn in cash for a week against eligible collateral, drawing on currency swap lines put in place earlier this month with the Fed.
”These operations are intended to address funding pressures over quarter-end,” the Bank said.
The Bank will also make $10bn available for overnight borrowing. It had previously agreed to provide $40bn daily in overnight money last week, but so far, there has not been demand for the full amount.
Moreover, the Bank said it will inject longer term money into the sterling markets, as banks had been pressing it to do. It said it will extend its long-term repurchase operations against extended collateral, including mortgages. As of September 29, it will offer £40bn for maturity on January 15, taking banks through the year end when cash is generally hoarded by banks.
I take this as a sign that, even on a global scale, the "high rollers," who can think in terms of actions based on ten or more figures, recognize the growing outrage of "the rest of us." This does not mean that, as Krugman put it, doing nothing is a serious option. Rather, it means that the path to solution involves (and has always involved) players other than elected officials; so, rather than pursuing a rush to action grounded in "shock doctrine" thinking, we need interim measures that will buy time for more serious deliberation. If "the system" is in a position to provide those interim measures, then our Government should accept the time purchased on their behalf and use it wisely.
This amounts to little more than reinforcing Senate Banking Committee Chairman Chris Dodd's conviction that doing things right is more important than doing them quickly. The only change may be that, in its deliberations, the Congress should recognize that there are more voices to hear in addition to the Treasury Department and the Federal Reserve (and, oh yes, the President of the United States). When Krugman writes about "players throughout the system," he is writing about (among other things) sources for input for Congressional deliberation, some of which, as we have now seen in the Financial Times are based outside the United States but are still significant "players."
Admittedly, this is not a good time to be a member of Congress. There is growing hostility in just about every Congressional district, and every one of those districts gets to choose who will represent it on Election Day. One third of the Senate seats are in a similar position. However, as an extension of my premise about Barack Obama and John McCain, being a member of Congress takes priority over being a candidate. Every member of Congress up for election has an opportunity to demonstrate that actions taken in office during a time of crisis will always count for more than campaign rhetoric or even "pressing the flesh." Our entire Government is being tested over whether it can still do things right. If it fails that test, then the very foundations of our Constitution run the risk of being undermined; and that threat to the Constitution is even greater than any of those advanced by the Bush Administration!