The Big Bailout Lessons

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By Harold Meyerson

Two things we learned about our politics and our economy in 2008:

Lesson One: If it's big and you don't regulate it, you end up nationalizing it.

One of the major lessons of the year is that unregulated and underregulated capitalism ends up confronting democratic governments with a subprime choice: Either let a major institution go down and watch as chaos follows (the Lehman option) or funnel gobs of the public's money into such institutions to avoid such Lehman-like chaos.

It was the Bush administration, more than the government of any other nation, that demonstrated this iron law of economics, for it was the Bush administration that was most committed to laissez-faire economics. The White House and the Treasury, under George W. Bush and Bill Clinton, let an entire unregulated financial world rise alongside the more regulated consumer banks and brokerages. Uniquely under Bush, however, the regulation of regulated banks and brokerages broke down as well. In 2000, the Justice Department filed 69 cases of securities fraud based on Securities and Exchange Commission investigations. In 2007, it filed nine. And this year, Bush's Office of Thrift Supervision allowed IndyMac Bank to doctor its books so it wouldn't appear to be as insolvent as, in fact, it was.

When the American financial industry came tumbling down this year, the laissez-faire ideologues of this most ideological administration indulged their ideology just once, allowing Lehman to go under. Thereafter, as one giant institution after another tottered under the weight of dubious deals, the administration tossed ideology out the window and funneled money to the banks.

Laissez faire be damned, the ideologues concluded: When handed a Lehman, make Lehman aid.

The lesson for 2009 couldn't be clearer: To avoid nationalization, you need regulation. Or, the lesson's ideological corollary: To avoid socialism (to whatever extent throwing public money at banks is socialism), you need liberalism (that is, the willingness to restrain capitalism from its periodic self-destruction).

Presumably, these lessons haven't been lost on Barack Obama, who has pledged to re-regulate Wall Street. Whether he's selected the right people for this task remains to be seen. To head the SEC, he chose Mary Schapiro, who led the financial industry's own regulatory authority, over such proven investor advocates as former SEC commissioner Harvey Goldschmid. The issue isn't Schapiro's competence or probity, which are well established, but whether she shares the "deep suspicion of bankers, of Wall Street lawyers, and of corporation lawyers in general" that characterized (in the words of FDR consigliere Raymond Moley) Tommy Corcoran and Ben Cohen, the New Deal attorneys who drafted the original and highly successful Securities and Exchange Act. If she doesn't, considering that Wall Street and its apologists are already warning about the dire effect of new regulations on the economy -- and, one presumes, their annual bonuses -- we'll be bound for a new cycle of light regulation and heavy public bailouts.

Lesson Two: In matters economic, the Civil War isn't really over.

If Abraham Lincoln were still among the living as he prepared to turn 200 six weeks from now, he might detect in the congressional war over the automaker bailouts a strong echo of the war that defined his presidency. Now as then, the conflict centered on the rival labor systems of North and South. Now as then, the Southerners championed a low-wage, low-benefits system while the North favored a more generous one. And now as then, what sparked the conflict was the North's fear of the Southern system becoming the national norm. Or, as Lincoln put it, a house divided against itself cannot stand.

Over the past century, of course, the conflict between North and South has been between union and non-union labor. The states of the industrial Midwest and the South had common demographics (Appalachian whites and African Americans, though the Northern states also were home to Catholics of Eastern European origin) but developed two distinct economies.

Residents of the unionized north enjoyed higher living standards, both from their paychecks and the higher public outlays on health and education, than did their counterparts in the union-resistant South.

But, just as Lincoln predicted, the United States was bound to have one labor system prevail, and the debate over the General Motors and Chrysler bailout was really a debate over which system -- the United Auto Workers' or the foreign transplant factories' -- that would be. Where the parallel between periods breaks down, of course, is in partisan alignment. Today's congressional Republicans are hardly Lincoln's heirs. If anything, they are descendants of Jefferson Davis's Confederates.

The Republicans in the White House, however, couldn't afford to be so sectional, since they were still subject to Lesson One: Even if the cars were lemons, they had to make -- okay, once per column.

Happy regulated new year.