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Agree to Disagree

Norman Leahy

So this is what a financial panic looks like.

Yes, Virginia, these are tough times, no doubt about it. There are financial institutions teetering on the brink of ruin and the bad news is global. Central bankers are huddling with slightly humbled masters of the financial universe to come up with plans to save us all from having to sell apples on street corners.

Humbug.

The real casualties of the Panic of '08 have been principles -- those quaint notions that, when times were good, people said they cherished above all else. Perhaps you remember them: Free market capitalism. Fiscal conservatism. Limited government.

I mourn their passing. And you should, too, but not because it means we're all living in a less interesting version of France these days, but because what we have witnessed in just the last few weeks is a fundamental repudiation of the principles that made our nation great.

For a moment or two, it seemed that these ideals might survive. When the House stunned just about everyone and voted down the Wall Street bailout, it seemed that the market would be given an opportunity to enforce its rough, but necessary, disciple.

The Senate though otherwise. Its pork-rich substitute brought the bailout back to life and then some. The House, not surprisingly, swallowed it whole.

And in the days that followed, the market tanked. Trillions of dollars of paper wealth evaporated. This wasn't how it was supposed to work.   So, instead of buying bad loans and worthless paper, the Feds decided to put your money into the market directly, buying preferred shares in the nation's largest banks, and eventually in most of the rest, in a deal the bankers weren't allowed to refuse.

So now instead of owning only the bad paper, we own the bad banks, too. Congratulations.

If that was the end of the bailout mania, we'd have been lucky. Battered and bruised, yes. Poorer? Absolutely, and those principles would still be as dead a door nails.

But that was only the first act. Even as the government begins nationalizing banks, House Democrats are looking ahead to the next enormous pile of debt they can foist upon the nation in the guise of a $300 billion stimulus package.

Does the government have an extra $300 billion hidden in a sock somewhere, ready to be spent? Of course not. We have to borrow that, too. But what's a trillion dollars of new debt between friends?

Quite a lot, really. But no price is too high to bear when there's panic in the streets (really, there is … can't you see it?). Inside the next stimulus are a variety of plans and schemes to cure all that ails us. In the Wall Street Journal , we read that:

[Speaker Nancy Pelosi] envisions a bill that would include new spending on highways and bridges, extended benefits to unemployed workers, aid to cash-strapped states and a tax cut, congressional aides said.

Well, if it includes a tax cut, that is enough to buy-off some on the right (never mind the iceberg of debt just below the surface of those cuts).   And the aid to states? California has already said it might need a few billion to tide it over. And we're bailing out Romneycare in Massachusetts, too. Heck, Tim Kaine better get off the stick and ask for a couple of billion to help balance Virginia's books.

As bad as all this is for the nation's long-term fiscal health, there still might be a lot more to come. In addition to the borrowed money we're tossing around, there is also the very big question of how the government plans to make sure none of this ever happens again.

House Financial Services Chairman Barney Frank said the Bush administration's decision to invest directly in banks is a turning point in the debate over regulation.

"It has definitely changed Washington, very dramatically," the Massachusetts Democrat said. "Two years ago, the prevailing opinion was [that] we needed to deregulate further. Now, the argument is [over] what kind of new regulation we need."

And to think just a few years ago, Frank was among those who said there was no problem at all with either Freddie Mac or Fannie Mae and no new regulations were necessary. Yes, times do change. Or do they?

"This is equivalent to what FDR had to do ... to save capitalism from its own excesses," Rep. Frank said, referring to measures taken by President Franklin D. Roosevelt to calm markets and protect investors during the Great Depression.

Rep. Frank predicted that any legislation aimed at toughening oversight would face little opposition in Congress, especially after lawmakers have effectively exposed taxpayers to hundreds of billions of dollars in potential new liabilities.

"We're beyond the point where anybody will stand up and try to block this," he said.

We're beyond several points, congressman, none of which would have been passed had the market been allowed to correct itself. But, in the name of preventing a disaster (it's going to happen, I swear), those who for so long called themselves conservative, free marketeers joined hands with FDR's ghost to give the government powers that even the Sage of Hyde Park could only have imagined (I'm looking at you, Eric Cantor).

So we find ourselves ready to embark on FDR's fifth term. But instead of a gang of bright-eyed New Dealers, we're going into it with a gaggle of Democrats who helped create the current mess, and their feckless Republican sidekicks.

The only questions left are: "How much should I charge for my apples?   And would Libbie and Grove be a good corner to sell them on?"

Norman Leahy is vice president for public affairs at Tertium Quids, a statewide, free market advocacy organization. He is a contributor to several Virginia political blogs, including Bacon's Rebellion, Sic Semper Tyrannis, Bearing Drift and NBC 12's Decision Virginia. A 2006 graduate of the Sorensen Institute, Norman and his family live in Henrico County.

Thad Williamson

Do you remember what the presidential candidates were debating eight years ago this fall with respect to the economy?

Believe it or not, the debate in 2000 was about how best to spend the forecasted federal surplus. Despite losing the popular vote, George W. Bush won the voting among Supreme Court justices that year 5-4 and became president. He then proceeded to push for an enormous tax cut overwhelmingly benefitting the most affluent Americans.

At the time, there was widespread skepticism that such a large tax cut was really a prudent move. But Bush's plan got the green light, implicitly, from Alan Greenspan, then enjoying the height of his influence as chair of the Federal Reserve. As recounted in Ron Suskind's book "The Price of Loyalty," Greenspan endorsed the tax cut not because he thought it was great fiscal policy, but because he was frightened of a future in which the government accumulated large surpluses and actually paid off the national debt.

Now why would Greenspan have been afraid of a happy outcome like that?

One word:   Ideology.

Greenspan worried that a federal government with large surpluses would either launch large spending initiatives, or worse still, begin making investments in private companies like any other well-to-do household with significant savings. The idea that the public might buy shares in private companies was considered anathema to Greenspan's vision of free market capitalism.

Much has changed since 2000 and 2001, from the nation's fiscal condition to the solvency of our major financial institutions to Americans' confidence in the future. But perhaps the biggest and most important change is this: The rapid development of events over the past month has caused policymakers to toss ideology out the window and start doing what makes sense.

I'm not talking about Nancy Pelosi, Harry Reid, Barack Obama, Joe Biden or Hillary Clinton. Democratic leaders have generally been cautious -- too cautious -- in their responses to the financial crisis, and a little too willing to give the Treasury Secretary enormous powers.

Rather I'm talking about Henry Paulson and the Bush Administration, who announced plans this week to partially nationalize nine major banks in hopes of stabilizing financial markets.  

The logic of this move is clear and impeccable. The threat to the economy posed by the current crisis is an absence of money available for lending as banks find themselves overstretched by bad loans and investments. The federal government will inject capital directly into the economy by re-capitalizing the banks. In exchange, the government gets an equity share in the participating banks.

This is the right approach at this time -- one that addresses the immediate problem at hand and also protects the taxpayer's investment, by giving the public a stake in the banks going forward. (The plan would be better yet if government insisted on getting voting shares in the banks, not just non-voting shares.) Indeed, it was the right approach two weeks ago too -- the only thing holding the Bush Administration back was its ideological aversion to the idea of the public owning financial institutions.

But when times get tough enough, ideology falls away, and pragmatics take over. The truth is that the only force capable of assuring that the current financial crisis does not become a full-fledged depression is the public sector and the government's capacity to undertake dramatic action to stabilize markets -- a capacity that didn't yet exist in the days of Hoover but that has been foundational to the stability of modern capitalist economies since the 1930s.

That practical truth connects to a yet more fundamental point:   the fact that there is no such thing as a free market divorced from government. Rather markets are constituted by laws and the public sector, and in modern economies the public and private sectors are deeply intertwined. It's when we pretend otherwise, and act like regulation is always a bad thing, that we run into serious financial catastrophe, be it in the form of the Savings and Loan crisis of the 1980s under the watch of Reagan and Bush I or in the current bank bailout of failing financial institutions.

Does this mean that the U.S. government is going to have a permanent long-term stake in these banks, and that we are on the road to "socialism," as some conservatives lament? Probably not. If the plan works and the economy recovers over the next couple of years, eventually the government will likely sell its equity stakes in the banks, hopefully at a profit.

There is nothing wrong with the public taking equity stakes in firms, and the historical record shows that there is no inconsistency between   having a "mixed economy" (characterized by a mix of a private and public ownership) and either economic well-being or the preservation of a free society.  

In tough times, the federal government can and should do what many states and localities quietly have been doing for years: taking on the role of venture capitalist, creating jobs and even turning a tidy profit in the process. Nonetheless, odds are that an Obama Administration (if that's what we have) will not be anxious to hold on to public stakes in these banks any longer than necessary.  

But while nationalization of banks may be a temporary move, the shift away from laissez-faire, deregulate-everything approaches to organizing our financial system should be permanent. This crisis has reminded everyone that the wheels of capitalism are powered by credit, and that the entire system, at the end of the day, is underwritten and secured by government. (We have the New Deal to thank for the fact that ordinary people are not now worried about losing the money in their checking accounts, which is insured by the FDIC, established by FDR in 1933.)

Put another way, if the capitalist economic ship runs ashore and is danger of sinking, it is government who must do the bailing out. That's why the public has a permanent interest in regulating how the ship is steered in the first place, and in preventing financial institutions from undertaking risky or irresponsible investments.

Exactly how to do that in a 21st century context is a complex question the next President will have to tackle.   That won't be an easy job, but it should be made a little easier by the dramatic collapse this month of free market ideology, signed and sealed by free marketers themselves.

Thad Williamson is an assistant professor of Leadership Studies at the University of Richmond. After growing up in Chapel Hill, N.C., he earned his bachelor's degree at Brown University, a master's degree in theology from Union Theological Seminary (New York) and a doctorate in political science from Harvard University. He is the author of three books and has written on public affairs for numerous national publications.