更佳的纾困本为可能

By: Rob Johnson and George Soros

Back in 2008, a critical opportunity was missed when the burden of post-crisis adjustment was tilted heavily in favor of creditors relative to debtors. The result was not only prolonged stagnation, but also the Republican Party’s embrace of demagogic populism and the election of Donald Trump.

The recent exchange between Joe Stiglitz and Larry Summers about “secular stagnation” and its relation to the tepid economic recovery after the 2008-2009 financial crisis is an important one. History does not repeat itself, but it rhymes, Mark Twain reportedly once said. But, to paraphrase Bob Dylan, in light of our recent economic history, history doesn’t rhyme, it swears.

Stiglitz and Summers appear to agree that policy was inadequate to address the structural challenges that the crisis revealed and intensified. Their debate addresses the size of the fiscal stimulus, the role of financial regulation, and the importance of income distribution. But additional issues need to be explored in depth.

We believe a critical opportunity was missed when the balance of the burden of adjustment was tilted heavily in favor of creditors relative to debtors in the response to the crisis and that this contributed to the prolonged stagnation that followed the crisis. The long-term social and political ramifications of this missed opportunity have been profound.

Back in September 2008, when then-US Secretary of the Treasury Hank Paulson introduced the $700 billion Troubled Asset Relief Program (TARP), he proposed using the funds to bail out the banks, but without acquiring any equity ownership in them. At that time, we and our colleague Robert Dugger argued that a much more effective and fair use of taxpayers’ money would be to reduce the value of mortgages held by ordinary Americans to reflect the decline in home prices and to inject capital into the financial institutions that would become undercapitalized. Because equity could support a balance sheet that would have been 20 times larger, $700 billion could have gone a long way toward restoring a healthy financial system.

The ability to use funds to inject equity into the banks was not part of the bill presented to the US House of Representatives. So we organized for Representative Jim Moran to ask House Financial Services Chairman Barney Frank in a pre-arranged question whether it was in the spirit of the TARP legislation to allow the Treasury to use taxpayers’ money in the form of equity injections. Frank replied in the affirmative on the House floor.

This was in fact a tool that Paulson used in the closing days of George W. Bush’s administration. But Paulson did it the wrong way: he summoned the heads of major banks and forced them to take the money he allocated to them. But by doing so he stigmatized the banks.

A few months later, when President Barack Obama’s administration arrived, one of us (Soros) repeatedly appealed to Summers to adopt a policy of equity injection into fragile financial institutions and to write down mortgages to a realistic market value in order to help the economy recover. Summers objected that this would be politically unacceptable because it would mean nationalizing banks. Such a policy reeked of socialism and America is not a socialist country, he asserted.

We found his argument unconvincing – both then and now. By relieving financial institutions of their overvalued assets, the Bush and Obama administrations had already chosen to socialize the downside. Only the upside of sharing in the possible stock gains in the event of a recovery was still at issue!

Had our policy recommendation been adopted, stockholders and debt holders (who have a higher propensity to save) would have experienced greater losses than they did, whereas lower- and middle-income households (which have a higher propensity to consume) would have experienced relief from their mortgage debt. This shift in the burden of adjustment would have imposed losses on the people who were responsible for the calamity, stimulated aggregate demand, and diminished the rising inequality that was demoralizing the vast majority of people.

We did recognize a problem with our proposal: providing relief to over-indebted mortgage holders would have encountered resistance from the many homeowners who had not taken out a mortgage. We were exploring ways to overcome this problem until it became moot: the Obama administration refused to accept our advice.

The approach of the Bush and Obama administrations stands in stark contrast both to the policy followed by the British government, and to earlier examples of successful financial bailouts in the United States.

In Great Britain, led by then-Prime Minister Gordon Brown, undercapitalized banks were told to raise additional capital. They were given the opportunity to go to the market themselves, but they were warned that the UK Treasury would inject funds into them if they failed to do so. The Royal Bank of Scotland and Lloyds TSB did require government support. The equity injections were accompanied by restrictions on executive pay and dividends. In contrast to Paulson’s method of injecting funds, banks were not stigmatized if they could borrow from the markets.

Similarly, during the Great Depression of the 1930s, the US took ownership and recapitalized banks via the Reconstruction Finance Corporation (RFC) and managed mortgage restructuring through the Home Owners’ Loan Corporation (HOLC).

No doubt the Obama administration helped to alleviate the crisis by reassuring the public and downplaying the depth of the problems, but there was a heavy political price to pay. The administration’s policies failed to deal with the underlying problems, and by protecting the banks rather than mortgage holders, they exacerbated the gap between America’s haves and have-nots.

The electorate blamed the Obama administration and the Democratic Congress for the results. The Tea Party was formed in early 2009 with large-scale financial support from the billionaire Koch brothers, Charles and David. In January 2010, Massachusetts held a special election for the late Ted Kennedy’s Senate seat, just after Wall Street paid extravagant bonuses, and elected the Republican Scott Brown. The Republicans subsequently took control of the House of Representatives in the 2010 midterm elections, gained control of the Senate in 2014, and nominated Donald Trump, who was elected in 2016.

It is essential that the Democratic party recognize and correct its past mistakes. The 2018 midterm elections, which will set the stage for the 2020 presidential election, is an excellent opportunity to do so. The political and economic problems that confront the country are much deeper today than they were ten years ago, and the public knows it.

The Democrats must recognize these problems, not downplay them. This year’s midterm elections will be a plebiscite on Trump, but the Democratic presidential candidate in 2020 must have a program that many Americans find inspiring. The electorate has seen where the Republicans’ demagogic populism leads, and a majority should reject it in 2018.