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Robert Reich: Why Paulson and Bernanke are only Partly Correct, and Why Main Street Needs More Direct Help

September 24, 2008

Robert Reich

But will it work? Here’s Paulson’s and Bernanke’s logic, made explicit at the Senate hearing [yesterday]: There’s only a certain amount of bad debt on Wall Street’s books, left over from the wild and woolly days of lax mortgage lending. Once removed from the Streets’ books, credit will flow again. And once credit flows again, even Main Street can breath a sigh of relief.

P&B failed to mention that bad debts are growing even among people recently considered good credit risks. At end of August, 6.6 percent of mortgages were at least 30 days past due. That’s up from 5.8 percent at end of June. We’re also seeing a growing amount of credit card and auto payments past due.

The culprit isn’t just those sub-prime loans. With jobs and wages dropping across America, many people who had been able to pay their bills no longer can.

It’s no coincidence that states where mortgage delinquencies are highest are also states with the highest rates of job losses. According to the Bureau of Labor Statistics, the official rate of unemployment in California last month was 7.7 percent. That’s up from 5.5 percent a year ago. In Florida, unemployment has climbed to 6.5 percent, from 4.1 percent a year ago. No surprise that bad debts are mounting fastest in California and Florida – and elsewhere around the country where jobs are evaporating fastest.

Note that these are just the official rates. Some 600,000 fewer jobs are listed on the nation’s payrolls than were there last year. Millions more Americans are too discouraged even to look for work. And as employers squeeze their payrolls, even people with jobs are putting in fewer hours.

Bailing out Wall Street’s bad debts when millions more Americans can’t pay their bills is like bailing out a rowboat springing more leaks while the ocean is rising. Many of the average taxpayers being asked to take on Wall Street’s bad loans are the same people whose incomes are dropping, which means they’re struggling to pay their debts and potentially creating even more bad loans.

Congress should drive the hardest deal it can with Wall Street. But Congress also needs to pay direct attention to Main Street. It should extend unemployment insurance, freeze mortgage rates, and pass a stimulus package that generates more jobs.

Bottom line: Unless Americans on Main Street have more money in their pockets, Wall Street’s bad debts will continue to rise — which means the Bailout of All Bailouts grows even larger, which means taxpayers take on even more risk and cost.

Robert B. Reich is Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written eleven books (including his most recent, Supercapitalism). Mr. Reich is co-founding editor of The American Prospect magazine. His weekly commentaries on public radio’s “Marketplace” are heard by nearly five million people. This entry appeared on his blog.

Copyright 2008 Robert B. Reich

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