Expect a lot of today's chatter about the new Treasury plan to buy direct stakes in nine banks to revolve around one question: What took so long? A lot of the pain over the last two weeks could have been avoided had the White House announced this plan on September 22. Coming out of a meeting with top Hill Democrats yesterday, EPI economist Jared Bernstein told reporters, "The consensus was so strong towards direct equity injections that there was literally no dissension on the point. ... The only head-scratching is why did it take us so long to get here?"
Hindsight is a wonderful thing, but in this case it could lead us to underestimate the enormity of today's news. The government has undertaken similar direct interventions before--such as individual corporate bailouts, or the savings-and-loan rescue--but never of this size or scope; while today's move is directed at nine of the country's largest banks, the program is open to the entire sector. And while the S&L bailout was engineered to more or less shut down the industry, American banking will survive, and flourish. Which raises the question that people should really be asking of the White House: Quo vadis? Bush's assurances that the intervention will be "temporary" notwithstanding, we have entered a new world of American capitalism, a transit comparable in historical importance to the early days of the New Deal. By directly bailing out the banking sector (as opposed to the earlier plan to merely buy their bad assets), the administration has put the full faith and credit behind the engine of the U.S. economy. This means that the administration, or more likely its successor, will need to articulate new doctrines regarding moral hazard and the limits of industry bailouts--if banks, why not carmakers? It raises the question of why such an activist government can't also respond with similar bold steps to confront the health-care crisis: If it can effectively rewrite the rules of the banking sector, why can't it do the same for insurance? This may be Bush's baby, but liberals would be remiss if they didn't see the opportunities to relaunch government activism beyond Wall Street.