Can $7.4 Trillion Restore Trust in Markets?

Can trust be bought, and if so, what’s the price? Based on the latest news coming out of the Federal Reserve, the price tag for restoring trust in the nation’s markets is now up to $7.4 trillion. (Bloomberg News, Nov. 24) That’s the amount that the Fed is prepared to lend to prevent financial markets from seizing up. This sum is above and beyond the $700 billion that Congress approved in October for the Treasury Department’s Taxpayer Asset Relief Program, or TARP.

At first the problem was Fannie Mae and Freddie Mac. Then it extended to Bear Stearns and AIG, and the collapse of Lehman Brothers. Now Citibank is in bailout talks, the Big Three automakers are on the verge of bankruptcy, and the Fed is planning to buy as much as $2.4 trillion in short-term notes and $1.4 trillion from the Federal Deposit Insurance Company (FDIC) to guarantee loans from one bank to another.

Is anybody in charge, and does anyone know what will stop the bleeding? Given the shifting explanations for how bailout money will be used, the lack of transparency and accountability for the sums committed, and the soaring size of taxpayer intervention – $7.4 trillion! — it is clear that we are in dangerous, uncharted territory.

For now, the immediate need is to stabilize the economy and restore some modicum of trust. In a perverse way, Robert Rubin and Lawrence Summers — two key architects of financial deregulation — may be best-suited to this task. It takes a thief…. And yet, the levels of self-dealing and self-delusion at the highest levels of finance and government have been so pervasive, that it is hard to believe that the Bigfoot players will actually restore trust.

Writing in The Nation, Naomi Klein astutely dissects the bailout as Bush’s Final Pillage. With shifting explanations for the TARP bailout and its implementation, Treasury Secretary Paulson has been singularly ineffective at his stated goal of restoring trust — but highly effective in siphoning huge sums to banks. Klein writes:

When the Bush administration announced it would be injecting $250 billion into America’s banks in exchange for equity, the plan was widely referred to as “partial nationalization”—a radical measure required to get the banks lending again. In fact, there has been no nationalization, partial or otherwise. Taxpayers have gained no meaningful control, which is why the banks can spend their windfall as they wish (on bonuses, mergers, savings…) and the government is reduced to pleading that they use a portion of it for loans.

What, then, is the real purpose of the bailout? I fear it is something much more ambitious than a one-off gift to big business—that this bailout has been designed to keep pillaging the Treasury for years to come. Remember, the main concern among big market players, particularly banks, is not the lack of credit but their battered share prices. Investors have lost confidence in the banks’ honesty, and with good reason. This is where Treasury’s equity pays off big time.

….for the banks, the best part is that the government is paying them—in some cases billions of dollars—to accept its seal of approval. For taxpayers, on the other hand, this entire plan is extremely risky, and may well cost significantly more than Paulson’s original idea of buying up $700 billion in toxic debts. Now taxpayers aren’t just on the hook for the debts but, arguably, for the fate of every corporation that sells them equity.

The spreading tide of troubles at other banks, and in other sectors of the economy, signals the colossal failure of the $700 billion bailout. Based on the numbers, it’s at least ten times as bad as originally presented.

When even Alan Greenspan admits that his free market convictions are no longer operative, and when noted economists confess to a perplexity about how bad things are and how to solve them, it’s clear that we are no longer in the realm of economics and policy. What we are witnessing is the collapse of a cultural mythology — the myth of self-regulating free markets and the political ideology that has championed it for a generation.

There is some comfort to be had in self-delusions being laid bare — at least until market apologists weigh in with their instant-revisionist histories. Still, the task of re-conceptualizing the ideal parameters of a healthy economy is only beginning.

Besides inaugurating a new regime of international regulation and new types of government oversight, a more basic intellectual excavation is needed. How shall we define “value” in a market economy? How shall we make such definitions comport with actual resources, risk, need and “demand”? Is market price an adequate metric of value?

Given the propensity of markets to ignore hidden subsidies from the commons and to dump their wastes into the commons, the very idea that price can adequately convey the many dimensions of “value” is problematic. After all, the current financial meltdown has revealed how unreliable prices actually were as an indice of value. They did not reflect the costs of government-subsidized risk, or the social disruptions and environmental damage of normal business, or the costs of government intervention to bail out firms “too big to fail.”

Prices did not incorporate these other, quite real genres of value. And yet these “efficient” market prices were seen as real. And why not? They were so darn useful. For investors, prices served a valuable function in privatizing profit and socializing risk. Investors benefited from systemically excluding important risks and costs, particularly when the government, in the end, would have to step in and cover those risks and costs.

It may be too early to initiate an ideological autopsy on free market myths while catastrophe looms. There’s too much going on and, in any case, the first priority must be to save people’s homes, jobs and retirement savings, and major economic sectors. But after the financial reckoning is met, and some measure of stability and trust is restored, there must be a frank and far-reaching ideological reckoning.

Originally published by David Bollier at under a Creative Commons Attribution license.