Can Bailouts Actually Work?

When the financial world was turned upside down last fall, there was gnashing of teeth aplenty at what seemed to be the Bush Administration's bailout after bailout of wayward banks.

One side of the aisle complained that the government had no business tampering with free markets and the other complained that why should public money be used to save hubristic and overpaid corporate executives.

As the Bush years faded into the Obama ones, lots of people conveniently forgot upon whose watch this fell. For instance, I interviewed U.S. Rep. Eric Cantor a few weeks ago and he was complaining that "we have to get the government out of the capital markets." I pointed out that George Bush and Treasury Secretary Henry Paulson, both Republicans like Cantor, were the ones that inserted the feds into finance. He was silent for a full 15 seconds protesting that it was seen as a catastrophe. I guess Eric typically gets a free and unchallenged ride from the Virginia media.

Anyway, on to my point. The news today is that 10 big bailout banks -- J.P. Morgan Chase & Co., Goldman Sachs Group, Morgan Stanley, BB&T, U.S. Bancorp, American Express, Capital One, Bank of New York Mellon, Northern Trust and State Street -- all want to start paying back their billions in bailout funds.

Good news, to be sure. It shows that a recovery might actually be in the offing. And it shows that the banks want federal government restrictions brought on by the bailouts, gone.

The news points out another thing. It is fairly common in financial crisis to have a government bail stuff out and it can be only temporary. A couple case points:

• Chrysler was slammed by shoddy cars and bad decisions in the 1970s. It got federal loan guarantees worth $1.5 billion in 1979. New management saved the day and the firm paid everything back by 1983.

• Long Term Capital Management, a big hedge fund, went bust in 1998, threatening plenty of investors. It came as much of the rest of the world, Thailand, Taiwan, Singapore, Japan, Russia, and Mexico were going through or had gone through bad times. The Ne York Fed arranged more than $3.6 billion in loans which were paid back by 2000.

There are other example,s but you get the point. It is actually a tried ands trusted practice for the government to come in with bailouts and sometimes it works. If this sounds like I'm saying something positive about George W. Bush it may well be.

I am not addressing, however, the massive bailouts of American International Group, one of those "too big to fail" firms. What has happened is shameless and I wish grand juries and Congressional probes on the perps. And, there is a legitimate question out if these types of bailouts tend to perpetuate a flawed financial system that got us into trouble in the first place.

But I stand by my point -sometimes bailouts are good things and can work.

Peter Galuszka

Free Markets Forever? Let History Judge

"Let History Judge" was the title of the book of one of my favorite Soviet-era historians -- Roy Medvedev. I used to visit him back in the 1980s in his yellow-colored apartment building in the northwest quadrant of Moscow.

His type of five-story building was called a "Khruschovy" after Khruschev because lots were built in the Nikita years of the 1950s and early 1960s. Medvedev's book also had a Khruschevian twist since it detailed the crimes of Josef Stalin -- something permissible only after Khruschev's "secret speech" of 1956.

Now comes an exhortation of another dynamic Soviet-era leader. Mikhail S. Gorbachev writes in Sunday's Washington Post that the West could use a little perestroika right now. And he's damned right about that.

Gorbachev will go down as one of the most important game changers of the late 20th century. He set the stage for the generally peaceful transition of a massive and hateful totalitarian state. His perestroika or "rebuilding" was flawed since it assumed the socialist state could be merely changed instead of dumped, but he still represents an uncanny honesty in analysis. For children of the Cold War such as me, that's a bizarre irony since we were taught that Communist leaders only lie.

Here's the essence of Gorbachev's argument:

"In the West, the breakup of the Soviet Union was viewed as a total victory that proved that the West did not need to change. Western leaders were convinced that they were at the helm of the right system and of a well-functioning, almost perfect economic model. Scholars opined that history had ended. "The Washington Consensus," the dogma of free markets, deregulation and balanced budgets at any cost, was force-fed to the world.

"But then came the economic crisis of 2008 and 2009, and it became clear that the new Western model was an illusion that benefited chiefly the very rich. Statistics show that the poor and the middle class saw little or no benefit from the economic growth of the past decades.

"The current global crisis demonstrates that the leaders of major powers, particularly the United States, had missed the signals that called for a perestroika. The result is a crisis that is not just financial and economic. It is political, too.

"The model that emerged during the final decades of the 20th Century has turned out to be unsustainable. It was based on a drive for super-profits and hyper-consumption for a few, on unrestrained exploitation of resources and on social and environmental irresponsibility."

I don't know of many who could say it better. I was in Moscow as a journalist during the Gorbachev era and then during Yeltsin. With Gorby, there was a great excitement, sort of like the mood in the U.S. in the 1960s when a number of big revolutions were underway, notably in race relations, sex roles and economic inequality. Gorbachev was much loved but when fast-paced history overtook events and the USSR fell apart in December 1991, there was an orgy of self congratulation in the West. Many, my New York-based editors included, said it was the triumph of Reagan-Thatcher free market policies, which, we now know, gives far too much credit to both conservative leaders.

When I returned to my Moscow post in 1993, I naturally couldn't believe the changes. The KGB didn't follow me around, they were working at private security at upscale grocery stores and came up to say hello, knowing me by name and asking how it was to be back. Along showcase streets once tightly controlled to let the Zil limos of the Party bosses race past, there were occasional mob shootouts.

But perhaps the most stunning change was how the U.S. Embassy no longer seemed very important. The sources you absolutely needed to have were at the International Monetary Fund.

The West, lead by George H.W. Bush and then by Bill Clinton, pretty much handed over running policies for the New Russia to the bureaucrats of the IMF, who, of course, were pushing the standard medicine of free markets trump all everywhere. Moscow had better balance its budget, get control of its money supply, end government services and get with the program if it were to get its next tranche of $4 billion in aid.

I'll never forget what one Russian official, an old friend, warned me about. He was a little older than I and had been a Party apparatchik helping run a tractor factory. He was a pretty bright guy, ended up getting an MBA from Harvard and came back and took over the tractor factory in an LBO in the new privatization world. He was very worried saying that the West just didn't get it. All the social services provided by the state, cradle to grave coverage of medicine, schools, vacations and funerals, went through the factories. After privatization, the social services were the first to be cut. Nothing was there to take its place. He said this was foolhardy, no matter what bullshit the IMF was pushing. The Chinese weren't doing it this way and were a lot more successful.

And guess what? He was right. That's one reason we have Putin and his shadow government of siloviki or power players today.

Gorbachev is dead on right about our need to rethink and restructure. We really need to stop thinking that the "free market" can solve all problems. Our supposedly wonderful economic model really only benefited the very rich. But today, everyone is paying the price for mindlessly following the ideas of laissez-faire conservatives.

So, let's chuck the absolutist dogma of free markets, and, as Roy Medvedev would say, "Let History Judge."

Peter Galuszka