The inherent flaw of the bailout was that it did not address the structural flaws of the economy, which could be addressed by a non-corporate and community-based economic democracy.
The economic crisis that occurred in September of 2008 initiated a mode of public policy that bridged two presidential administrations and two political parties. Commonly referred to as the bailout of the financial system, it gave government support to large corporations in an attempt to avoid a depression as great as the Great Depression of the 1930’s. Though enacted before the transition from the Bush administration to the Obama administration, president Obama has fully supported this approach in his first year in office. Even though it was argued that these large financial institutions were “too big to fail”, the use of taxpayer money to save large corporations illustrated a long-term economic trend in public policy to favor corporations in general in the U.S. economy. It can be argued that an emphasis on local ownership, and expanded ownership as well, may be a far better alternative to sustain a stable economy. The 2008 bailout can be critiqued as a symptom of a larger economic problem.
The Emergency Economic Stabilization Act of 2008 was enacted on October 3, 2008. It was formed in response to the subprime mortgage crisis which was the first stage of the larger global economic crisis. The Treasury Secretary was authorized to spend up to $700 billion to purchase distressed assets including mortgage-backed securities. These mortgage-backed securities were made possible by the repeal of the Glass-Steagall Act in 1999 which allowed banks to use holdings, such as mortgages, in financial speculation. These financial speculations became ever more abstract and precarious, so that when there was failure either on the mortgage side or the speculation side huge amounts of money were lost. Many people had their homes foreclosed, large banks who engaged in this speculation became insolvent, and there was a lack of monetary liquidity. The $700 billion used by the government was capital injections into these banks in order for them to extend credit into the economy. The Act’s goal was to purchase bad assets and reduce uncertainty regarding the worth of the remaining assets through the Troubled Assets Relief Program.
The increase in financial speculation as the main component of the national economy was a culmination of economic policy that began in the early 1980’s as a dismantling of the principles of the New Deal. Government regulation was seen as an impediment to economic growth and there was a shift toward supply-side activity instead of demand-side support. It was believed that making large corporations prosperous would trickle down to better wages, more employment, and lower prices of goods. This attitude was extended to banking and financial speculation as a way to generate money that would in turn go into the major businesses and industries that still existed in the United States. When the economic crisis occurred, the emphasis on supply-side still was maintained despite a change in political parties in both the Congress and the White House. By stating that these banks were “too big to fail”, one can see the major deficit of supply-side economic policy. Even though supporting businesses can have more long-term and large-scale structural effects on an economy than just increasing the spending power of individuals, a side-effect of this policy is the growth of large corporations that can have increased political influence for their own self interest rather than the development of the economy. In other words, the bailout of the large banks can have the appearance of a positive short-term benefit, but it carries with it a long-term negative cost. This cost is best described as “socialism for the rich and capitalism for the poor” where government action protects large corporations while leaving small businesses and individual workers or consumers to compete according to the dictates of the free market. The best example of the failure of this policy has been the increase in executive bonuses with bailout money while the credit for small businesses or homes has come to a standstill. The fact that taxpayer money is going directly to large banks without any direct return on that money shows that the failure of the bailout lies in the fact that it perpetuates a structure much more than growing an economic infrastructure that will hire people and stimulate production and consumption.
An alternative to a policy of saving businesses that are “too big to fail” is direct support for businesses that are directly connected to communities as well as its workers. This would be a convergence of the supply-side and demand-side of an economy where there is a recognition that workers, who should be owners, are also consumers and taxpayers. The $700 billion that was originally allocated could have been detoured around the large banks and into smaller community-based banks and credit unions. For those communities that do not have a community bank or credit union, grants could be given to city and town governments by way of their business development programs. The money and grants would come with the mandate that the money would be used for start-up loans, micro-credit, and capital ownership plans for locally-owned businesses. The start-up loans would have a preference for cooperatives and the self-employed, at least 70% of the start-up loans would be required to be issued for businesses where workers are also owners. Micro-credit would be issued as very small targeted loans for preexisting businesses in order to make repairs, upkeep, or expand their operations. The start-up loans for cooperatives and the self-employed would be interest-free, ranging from $500 to $50,000. The micro-credit would also be interest-free, ranging from $200 to $2,000. As new businesses are stimulated that are more democratic and more embedded into their community, capital ownership plans would transition businesses that already exist into a more democratic and cooperative framework. Through grants issued by each state, from the original money allocated by the national government, assistance can be given to companies for setting up employee stock ownership plans. This can be a gradual process where employees are initially paid a small capital wage in stock and underpinning that ownership with dividends when the business shows a profit. Existing local utility and power companies would also have the ability to convert into consumer cooperatives. These grants would also be supplemented by laws that would give employees the right to purchase equipment and buildings shut down by companies abandoning that line of business or leaving the community, so that the workers can develop their own enterprise in that community.
The community investment that entail grants for start-up loans would stimulate the growth of cooperatives where workers are also owners and able to control their own economic destiny. Micro-credit would help with small specific business needs such as a restaurant buying a new stove or a business fixing the transmission on a delivery van without placing that local business into unnecessary debt. Both types of loans are designed in such a way as to make sure that the rate or possibility of business success is not hindered by the enormity of the loan or possible accrued interest. A general process, where a local economy can better reflect democratic principles for the empowerment of residents, would also occur with employee stock ownership plans for preexisting businesses and grants for workers to purchase land, buildings, and equipment from exiting corporations. This is a decentralized method of stimulating economic growth, and opening up of business credit, that does not reproduce the overall structure where corporations are the major actors in the national economy. The most positive effects would be harvested by this method, avoiding the ways that the bailout money has been misappropriated by the big banks. These grants would also have a more open and transparent approach and management, where local governments would have day-to-day oversight on how these loans are distributed. This will also make this alternative to the bailout a much more popular policy since it involves a local amount of control that is lacking with giving money to large corporate banks. In other words, grants for local businesses such as cooperatives would rebuild the economy while doing away with the old financial structures that deviated from economic stability.
Even though president Obama entered office on the hope of change, the continuation of the bank bailout is one example where he has preserved the economic status quo of the past thirty years. The economic crisis that began in 2008 could have given the nation the opportunity to reevaluate the economic principles that have existed so far. But the bank bailout obscured the chance to try something new where local control and a decentralization of economic power can cultivate businesses. There could have been true policy without the concentration of wealth and influence that goes against democratic ideals upon which the United States was founded. Instead, what has occurred is a large reward to those who helped cause the economic crisis.