The Recession

Americans Need Another New Deal

| by Nomi Prins

The U.S. government has simply thrown money at our current financial crisis, rather than solving it. We should be reviving President Franklin Roosevelt’s New Deal policies, which eased the immediate crisis of the Depression and installed lasting solutions.

The New Deal was a three-part plan. It didn’t just fund problems; it found solutions. First, it truly regulated and stabilized the financial system by dividing it into risky, and non-risky parts. The government then backed only the non-risky, consumer-oriented banks. Second, it provided long-term economic stability to Americans through social security and other social programs. And third, it created jobs to build infrastructure and got people working again.

In fact, only the elements of the New Deal that haven’t been deregulated over the years have maintained some order in the current crisis. FDR’s creation of the FDIC to insure customer deposits has staved off a national run on the banks. And the social security system continues to offer payments to seniors and the disabled, saving what might have otherwise been a market swipe at their retirement.

We need a revised New Deal now, because the philosophy behind its elements made sense.

New Deal legislation like the Glass–Steagall Act separated banks that risked their own money from the ones that protected ours. It was uniquely free-market to let investment banks carry the consequence of their own risk. That all changed when the act was repealed in 1999. As soon as all kinds of banks and insurance companies could merge, they quickly grew uncontrollable.

Now, as Wall Street struggles under the weight of its own recklessness, rather than taking a page out of the New Deal, the Federal Reserve and the Treasury Department are spurring on more mergers between banks and investment banks. Even after $700 billion worth of bailout dough is used to buy stock in Wall Street banks, credit card companies and automakers, two problems will still remain.

First, the Fed is on the hook for $3 trillion more since it quietly began allowing flailing banks to post junky assets as collateral for Fed loans. Second, there is still no strategy connecting these injections and loans to fundamental changes or lasting economic recovery. Random does not count as a plan.

Mindless stock purchases will not help contain mortgage losses or margin calls. It will not keep people employed or create new jobs. It will not gently reduce consumer debt, nor keep Wall Street from deeply negatively consequential actions.

On the other hand, restructuring loans or taking an equity participation in people’s homes might help the real economy. So would investing in job creation instead of bank stock via capital injection. We have become a borrowing society because of mass inequality, spurred by enormous debt and an overly risky banking industry.

The New Deal meshed government rescue with economic restructuring and accountability. That’s precisely what we so deeply need today.

Do we need another new deal? Click here to see the debate.