Main Street remains suspicious of government plans to buy distressed mortgage assets. Leading politicians and newspaper editorials are struggling to explain how the financial bailout will help Main Street. They see that the challenge is to get the American people to come around.
In fact, it is the elites who are badly misguided. The reality is that the Paulson plan is nothing more than a government assistance package for a declining industry. It has been embraced eagerly by Democratic politicians who welcome the enhanced power they will enjoy as a result of merging Big Finance with Big Government.
The American people are being given two reasons to support the bailout, namely, that it is needed to prevent another Great Depression and that it will actually earn a profit for taxpayers. Both rationales are suspect.
The most credible evidence that the Main Street economy is in danger is that “Ben Bernanke is worried, so everyone should be worried.” In fact, no economic textbook, including Bernanke’s, offers any theory that predicts depression as a result of consolidation in the financial sector.
Harvard economist Kenneth Rogoff views the financial bailout as akin to a tariff for the steel industry or a subsidy for the auto industry.There is an important difference between the financial sector today and the financial sector of the early 1930s. Back then, our financial services were underdeveloped. There was no deposit insurance. When banks failed, there was no safe place for households to put savings, other than under a mattress. There was no place for them to go for mortgages.
Today, if anything, we have an overdeveloped financial sector. Harvard economics professor Kenneth Rogoff, former chief economist at the International Monetary Fund, believes that the financial sector in the United States is bloated and needs to shrink. The ongoing consolidation in finance has even further to go, in his view. While this is unpleasant for those who work in the field, it is necessary to achieve better balance in our overall economy. We could see a large reduction in the number of firms and the number of people employed in financial services without impairing households’ ability to invest safely or obtain credit that they can use prudently.