Ending Wall Street Welfare: Economist Says Democrats Need Long Term Strategy

Robert Kuttner, a widely published economist based at The American Prospect is providing some of the best commentary yet on the economic emergency precipitated by the excesses of the unregulated home mortgage and securities industries.

"Democrats will shortly become stewards not just of a temporary bailout but of a long term recovery strategy," writes Kuttner in a September 30th post "Learning from 1929". "They might as well begin by pointing us on the right path. That includes direct refinancing for homeowners, direct government involvement in the management of failing financial institutions that are recapitalized by government money, through something like the Reconstruction Finance Corporations of the Roosevelt era; and a transfer tax on stock and bond transactions, both to raise needed revenue and to damp down the kind of speculation that led to the meltdown. Then Congress can begin the task of regulating the financial system properly. The basic concept is that any financial enterprise capable of taking down the system requires the tight government supervision that in the recent past has been limited to commercial banks."

Kuttner suggests that the congressional Democrats are a long way from finding an authentic Democratic response that can effectively deal with the laissez faire and failed policies of Republicanism. Regulating the financial system correctly, argues Kuttner, is "the Democratic ideology. But lately, that set of core convictions has gotten rusty. It needs to be reclaimed, and fast. Too many Democrats are still thinking small."

Not, it should be noted, is the thinking of U.S. Rep. Joe Courtney (D-2) who voted no on the amended Paulson proposal this week for all the right reasons. He was the only member of the Connecticut delegation to do so.

Kuttner doesn't stop at the Wall Street "rescue". "Government will need to rely on substantial public spending to pull the wider economy out of the hole. Most of that can be raised by surtaxes on the wealthy and by transaction taxes on speculation, but it will also require a temporary increase in public deficits. Raise enough revenue to cover about $700 billion of financial recapitalization in year one, and in years two through eight use the proceeds for public works, infrastructure, good jobs, universal health coverage, expanded pre-kindergarten and child care."

Kuttner's corrections, in other words, call for a New Deal in the 21st Century, not just to quell the high-finance meltdown on Wall Street, but to reduce the economic insecurity felt by a growing number of working and middle income households. Let's hope that when the Congress votes again, more of Kuttner's formula will be part of the rescue.

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