Naomi Klein has got to be my favorite liberal commentator to read. Not because she's got any clue about what she's saying, but because she has an amazing ability to gather tons of fascinating and relevant facts and come to all the wrong conclusions, and every once in a while she'll say something brilliant that effectively debunks all the wrong things she'd said up until then. Radley Balko notes this same tendency, with her book The Shock Doctrine coming "dangerously close to making a Higgs-ian point about the growth of government at the expense of civil liberties in times of crisis."
Up until now (from what I can tell), Klein's interpretation of the recent financial meltdown has been the standard progressive party line – a mixture of sudden-outbreak-of-greed and deregulation. But about two weeks ago in the Nation, she published an article where she basically tows the libertarian line. The idea of the piece is that the Bush administration is being "like the Portuguese in Mozambique in the mid-1970s, [pouring] concrete down the elevator shafts" and running off with as much money as possible. Well, not him specifically – I guess we're meant to assume that he derives his pleasure from the well-being of the general "big business" community.
So, in the midst of this condemnation, she explains why the bailout is so insidious: it's not necessarily the money itself, but rather the signal that it's sending to the market – that "big business" has the backing of the US federal government. Very astute point, Naomi! But then she stumbles upon an even more fundamental point about the root of the crisis:
Interestingly, Fannie Mae and Freddie Mac both enjoyed this kind of unspoken guarantee. For decades the market understood that, since these private players were enmeshed with the government, Uncle Sam would always save the day. It was the worst of all worlds. Not only were profits privatized while risks were socialized but the implicit government backing created powerful incentives for reckless investments.
Now, with the new equity purchase program, Paulson has taken the discredited Fannie and Freddie model and applied it to a huge swath of the private banking industry. And once again, there is no reason to shy away from risky bets--especially since Treasury has not required the banks to give up high-risk financial instruments in exchange for taxpayer dollars.
In isolation, that's got to be one of the best analyses of the subprime crisis that I've ever seen. She says outright that the government's backing of the GSEs played at least some part in the meltdown. About a month and a half ago, Klein was of the opinion that "deregulation and privatization" were the culprits.
Unfortunately, in typical Naomi Klein fashion, the moment of clarity is brief, and her ultimate conclusion misses the point. She calls on the next president to stop the bailout, but instead of just leaving it at that, she says that: "All deals should be renegotiated immediately, this time with the public getting the guarantees." So, basically, while she concludes that private rewards/public losses was a bad model, rather than returning to private rewards/private loses, we ought to go to move to public rewards/public losses (i.e., nationalization). Damnit – she was so close to sounding like a libertarian!