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Michael J. Panzner Headshot

The Gifts That Keep on Taking

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There have been plenty of discussions about how much the bailouts of the financial system will cost U.S. taxpayers, with estimates ranging from $2 trillion to as high as $24 trillion. But maybe the focus should be elsewhere. Even if we assume that the lower number is closer to the mark, these efforts have proved to be much more expensive than we were led to believe, and the resources committed so far have not achieved the results predicted by policymakers.

The truth is, while the banking system has -- until now, at least -- avoided financial Armageddon, conditions have not returned anywhere close to normal. Although equity investors seem to believe that the worst is behind us, the banking sector remains in critical condition and dependent on the Federal Reserve for its continued survival. Meanwhile, many markets and financing mechanisms that Main Street has traditionally relied on are still frozen or broken.

Of course, our leaders in Washington will say their efforts have been successful because they prevented a full-scale meltdown of the financial system. What they forget to mention, however, is that the various bailout measures and the alphabet soup of support programs were not just put into place to stabilize the situation, as many now claim. They were supposed to get the credit system functioning again, to help revive a damaged economy.

In reality, that is is not where things stand right now. Reports indicate that lenders are tightening standards, jacking up interest rates and fees, arbitrarily slashing and cancelling credit lines, avoiding or refusing forebearance and other requests that might stir a still moribund housing market, and directing resources away from traditional lending activities towards speculative trading and other pursuits.

More galling to some, perhaps, is that instead of doing their part to counteract the rise in inequality they helped foster during the go-go years, which some observers feel contributed to the economic hole we are in right now, many financial institutions seem intent on exacerbating the disparity. They are reducing head counts among lower-paid staff and looking to boost the compensation of those who are already near the top of the pyramid, despite the unavoidable political fallout.

The fact that the mess has not gone away and is still festering in many parts of the financial world can't just be blamed on Wall Street, of course. In some cases, government moves to "fix" things have had the opposite effect, allowing already formidable losses to grow even larger.

Examples include the bailouts of Fannie Mae and Freddie Mac, each of which continues to bleed red ink in part because serious structural problems have not been addressed and there is no real accountability or plan of action associated with previous efforts. Just this past week, for example, Fannie Mae announced plans to tap nearly $11 billion in new aid after posting yet another massive quarterly loss, the Associated Press reported. bringing the total taxpayer commitment to nearly $96 billion for these two institutions alone.

Government-sponsored efforts to repair the damage in the financial world aren't the only area where the law of diminishing -- or even negative returns -- seems to apply. Consider the $787 billion stimulus package, which proponents claimed would get the economy moving again and stem the rising tide of unemployment. So far, at least, there's no real sign that we are getting our money's worth.

In fact, while many analysts cheered July's "better-than-expected" 9.4 percent unemployment rate and 257,000 drop in nonfarm payrolls, the truth is that we are still seeing a growing number of Americans without a job. Clearly, it doesn't make sense to exclude the record numbers of long-term unemployed or those who have thrown in the towel on finding work, as some Pollyanaish economists and policymakers have done, in assessing whether taxpayer funds are producing the desired results.

The cash-for-clunkers scheme -- to use what some might view as an entirely appropriate British synonym for "plan" -- represents yet another problem-solving attempt that could end up costing much more than the $1 billion -- plus the $2 billion just approved by Congress -- that the government has committed. Among other things, it draws funds away from many equally needy parts of the economy to help one politically-connected segment. It is also a quick fix that postpones much needed restructuring and has likely brought forward future sales that leave the industry vulnerable if, as I believe, the recent bounce proves short-lived.

Yet, instead of going back to the drawing board, analyzing where mistakes were made during the heat of the moment and thinking things through a bit more carefully, Washington has decided to adopt the young entrepreneur's mantra: If at first you don't succeed, try, try again -- and fast. While such a strategy might make sense where there is some credible basis for optimism, more than a few policymakers have admitted they are operating in uncharted territory and can't be sure any of these efforts will really succeed.

If there is a consistent theme to all of this, it is that Washington seems determined to commit more and more taxpayer funds on a moment's notice and with little to show for it. In fact, now that we have seemingly crossed the rubicon into a world where many are convinced that it is only governments, with their control over the public purse strings, that can solve all our problems, we've effectively settled for just one thing: the "gifts" that keep on taking.