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November 23, 2008

A Bailout Stuck in Low Gear

By David Ignatius

WASHINGTON -- Rather than continuing to debate who's worthy of federal money and who isn't, maybe Congress should just follow John Maynard Keynes' suggestion about burying money underground and letting people dig it up. That's as efficient a stimulus package as anything else I've heard lately.

We're now on Bailout 3.0, and the credit markets are beginning to unfreeze, at least by the primitive measure of banks' overnight lending to each other. The problem is that banks don't want to make riskier loans in this business environment, and who can blame them? They're looking over the edge of a cliff, and they can't afford to make more mistakes. So they're sitting on a lot of the $159 billion in government money they've already received.

The sad fact is that the global economic situation is continuing to worsen, and the time has passed for bickering over who deserves government money and who doesn't. Just get it out the door.

"I'm angry too, and I don't want to pay for this mess," says Eugene Ludwig, a former comptroller of the currency who has accurately predicted each stage of this unfolding crisis. "But we've got to keep this country together, and help people who are losing their jobs and their homes. Otherwise we're going to have breadlines."

David Smick, whose book "The World Is Curved" provided an eerily accurate forecast of the economic disaster we're now experiencing, was reviewing some numbers last week that help clarify the crisis. He noted that banks' excess cash reserves, which normally total less than $7 billion, have recently approached $400 billion. A lot of that is taxpayer money, which the banks aren't putting to use.

Why? "You'd have to be crazy to lend in this environment," says Smick. "They aren't lending because it's going to be a terrible 2009," and the banks don't want to get caught.

Meanwhile, the global economy is wheezing and sputtering as trade begins to stall. In May, it cost $150,000 a day to lease a cargo vessel; today, it will cost you just $7,000, according to Smick. From October to November, there was a 30 percent decline in sea trade, he says.

As trade dries up, the engine of growth in Asia will begin to power out. I'm told that when Chinese President Hu Jintao was in Washington last weekend for the G-20 summit, he talked privately about the risks for his country of slower growth. But China is relatively well-situated. The real danger lies with the emerging economies that have borrowed heavily to finance their export-led growth. By some estimates, this emerging-market debt totals $4 trillion to $5 trillion. What happens when these debtor countries can't pay?

In this high-risk environment, Washington should stop talking in either/or terms about the economic rescue. Assistance should be available for both bankers and automakers, and perhaps also for other industries caught in the downdraft. I'd like to see this aid administered in a less haphazard way -- through a national investment bank. Let's ask companies to come to this institution with their business plans; let's have a blue-ribbon board evaluate their proposals; and let's get money into people's hands, quickly.

That was Keynes' message in 1936, as he looked at the trauma of the Great Depression. The details of the stimulus plan mattered less than the fact of government spending. In a famous passage in "The General Theory of Employment, Interest and Money," he explained: "If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again ... there need be no more unemployment."

During an economic crisis, what matters is that the government keeps its foot on the accelerator. In managing the monetary side of the recovery, Fed Chairman Ben Bernanke has understood this need. His policy has been to hose the markets with liquidity, "and worry about mopping it up later," says Smick. A similar pedal-to-the-metal approach is needed in fiscal policy. As Keynes wryly observed, "Pyramid-building, earthquakes, even wars may serve to increase wealth."

It will fall to President-elect Barack Obama to complete the engine of recovery. I hope he will think about a national investment bank, as a nonpolitical, market-oriented way to distribute the cash. But however he decides to do it, Obama will have to get money quickly into the hands of people who need it.

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