The Paulson Saga

On the national level, house prices continue to decline, unemployment continues to rise as the economy heads downward, share prices engage in nerve-jolting gyrations that bring smiles one day and scowls the next, millions more Americans are relying on food stamps, and retailers gird for a Grinch-dominated Christmas.

Things are not much better in the two cities that are the centers of the economic storms. In Washington, the Wizards manage to invent new ways to lose ballgames; the Redskins prove that they are not in the same league as the Giants–well, technically in the same league, but only technically; construction projects are grinding to a halt; and the town is about to play unwilling host to somewhere between 1.5 and 4 million visitors, with portable potties in short supply.

In New York, the Knicks have managed to drag out the Stephon Marbury saga so long that it has worsened their already-slim chances of a respectable season, Plaxico Burress might have shot down the Giants’ chances of repeating their Super Bowl win, layoffs on Wall Street continue to mount, and the state and city budgets are drowning in red ink.

All this is obvious, especially to beltway types who get most of their news from the Washington Post and the New York Times. What is less obvious is a profound change in the nature of our government. Until now, we could rely on two constraints on government power. The first was built into our constitution by the system of checks and balances inherent in the separation of powers among the executive, legislative and judicial branches of government. Those checks have now been weakened by Democratic control of the White House, both Houses of Congress, and, when Barack Obama gets around to filling the numerous vacancies in the federal courts, the judicial system. No matter that the Democrats will not have a 60-seat, filibuster-proof majority in the Senate. The so-called moderate Republicans, probably with some help from John McCain, eager to burnish his bipartisan credentials, will give the Democrats the votes they need to deprive workers of the secret ballot in union-recognition elections, confirm overwhelmingly liberal judicial appointees, and bail out the auto companies.

The second constraint on government power has always been the market. Remember, it was Clinton political strategist James Carville who so chafed under the constraints that markets impose on policymakers that he said if there is reincarnation he doesn’t want to come back as a president, or as a pope, or even as a .400-hitter, but as the bond market because then he could “intimidate everybody”. But in a real sense the government now is the bond market, or at least the key economic player. The heads of Citigroup and other bankers, the president of General Motors and other automakers, the CEO of AIG and other insurers no longer look to markets to guide their policies, but to the U.S. Treasury and the Fed.

It is only a bit of an exaggeration to say that New York senator Chuck Schumer, the man whom columnist Charles Krauthammer calls “the noted automotive engineer”, has as much to say about what you will be driving in the future as the CEO of any of the auto companies who are in Washington rattling their begging bowls after a long drive from Detroit. Schumer might have to share authority with that noted analyst of balance sheets and the plausibility of business plans, House Speaker Nancy Pelosi, but no matter. She will decide whether the automakers business plans are really “new”, while Schumer orders out battery-driven vehicles that can manage 40 miles on a charge and are so expensive that they will require government subsidies.

Then there is the mortgage market, one that evolved from a quiet conference between a local banker and an applicant he had known since they were in elementary school together into an opaque securitized monstrosity. It will be restructured, but in response to the wishes of congressman Barney Frank rather than the play of economic forces operating in a free market. Frank sees mortgages as instruments to enable people who can’t afford the homes of their dreams to have those dreams fulfilled.

There’s more. Senate majority leader Harry Reid has given Elizabeth Warren, a consumer bankruptcy expert, a week or so to decide whether the ever-changing bailout plans emanating from the fertile mind of Treasury Secretary Hank Paulson are coherent, and how to restructure the regulation of financial institutions.

Paulson, of course, continues to preside over the billions-going-on-trillions that will be made available to whatever industries make the best case for a hand-out. You might recall that the Treasury secretary came to Washington after heading up Goldman Sachs, a firm now reporting billions in losses after abandoning its business model in favor of status as a government-sheltered commercial bank. Nothing more clearly demonstrates the shift of power from Wall Street to Washington than the Paulson saga. Once the man who raised private-sector funds for private-sector businesses from his perch at Goldman, he is now the man who distributes taxpayer funds to private-sector businesses from his perch at the Treasury.

Still, not all is gloom and doom. This ex-New Yorker still thrills at the sight of the Christmas tree being lit in Rockefeller Center, gas prices are well below $2, and the vast majority of Americans have jobs and are on time with their mortgage payments. Not small things, those.

Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).