This Time, Uncle Sam Has Got Our Back
By Laurence J. Kotlikoff and Perry MehrlingThursday, October 9, 2008; Page A21
For starters, the biggest subprime mortgage gamblers have already failed, been nationalized or been married off, shotgun-style, to banks run by grown-ups. Yes, lots of small shoes may still drop, but the Paulson "buy-up" bill, and, ultimately, the Fed's ability to print money, provides the Treasury and Federal Reserve all the tools they need. The media don't seem to have noticed, but Section 113 of the bill authorizes government capital infusions into the banking system as necessary -- something the British government is now doing and the Swedish government successfully did in the recent past. That means any bank with a viable business will not be allowed to fail simply because it is temporarily undercapitalized.
This may sound like socialism or state capitalism, but it's simply rearranging the financial furniture. As Americans have freaked out, Uncle Sam has stepped up. He'll continue doing so until we realize the sky is not falling. The $700 billion rescue authorizes the federal government to keep doing what it has been doing for the past year to the tune of $400 billion -- buying distressed assets at bargain-basement prices and selling insurance at high premiums. If all works out, Uncle Sam will make a killing. This would be great, given our government's real problem -- paying the long-term Social Security and medical costs of retiring baby boomers.
Point three is clear: This financial chaos has ruined our sleep but left our physical and human capital unscathed. We have the same productive capacity today we had a year ago. And if our capital hasn't changed, we've suffered no overall capital loss.
The economic tragedy comes if we get hypnotized by the bad news, ignore the good news, fight about things we're already doing (e.g., having Uncle Sam buy and insure troubled assets) and pull our economic heads inside our shells. We Americans have lots of moxie. What we need is a strong pep talk and absolute assurance that credit will continue to flow, that insurance policies will continue to be honored, and that Uncle Sam is willing and able to invest directly in the private economy on our behalf.
So after scaring us half to death, this would be a good time for our other uncles -- Hank and Ben -- to make clear that we're heading for a safe landing and that there is no way in hell they will let this economy go down the tubes.
Laurence J. Kotlikoff, a professor of economics at Boston University, is co-author of "Spend 'Til the End." Perry Mehrling is a professor of economics at Columbia University's Barnard College and author of "Fischer Black and the Revolutionary Idea of Finance."