The most prominent symbol on Wall Street these days isn’t one from the Nasdaq or the New York Stock Exchange.
The symbol that comes to mind when thinking about the nation’s financial system is a question mark.
The Fed’s $85 billion rescue of the gigantic, disintegrating insurer American International Group, announced Tuesday evening, was supposed to stabilize the crisis, which has taken down several prominent investment institutions.
And while it may have slowed the hemorrhaging, the government’s ad hoc approach to bailouts has raised questions about when it will step in and what plans are in the works to change the fundamental forces that created these problems.
It is time for the Bush administration, in collaboration with Congress, to clearly enunciate a plan to ease pressure on the roiling financial system.
It has been suggested that the most prudent path would be to resurrect the Resolution Trust Corp., a government-owned company created in the late 1980s to liquidate the assets of failed savings and loan associations. Today’s version would buy and eventually sell the mortgage paper that is effectively not trading, restoring liquidity to the market.
It’s an option worth exploring. In an op-ed piece in Wednesday’s Wall Street Journal, several former U.S. officials, including former Fed chairman Paul A. Volcker and former U.S. Treasury secretary Nicholas F. Brady, pushed the idea.
They said it’s clear the financial system needs basic reform. But in the near term, it’s imperative to get the “toxic real estate paper” out of the system. Failing to do so quickly will only allow the system to deteriorate further, leading to job losses and declining government revenues.
It’s a persuasive argument. But lawmakers and the administration must also address the fundamental problems that created this mess in the first place.
They include a lax regulatory structure and consumer spending that exceeds income. Colorado’s own former U.S. Sen. Gary Hart told a New York Times columnist the tax code should be rewritten to reward savings more than spending.
That’s a notion worth considering. It might dissuade consumers from attempting to buy more house than they can afford or taking out home equity loans.
It’s also clear that more serious government oversight is a necessary part of any long-term fix. The assumption was that the market would police itself, which has proven not to be the case.
As the world’s financial markets absorb the implications of the latest series of shocks, it’s incumbent upon our government leaders to take further steps to address both the long- term causes and the short-term effects of the crisis.
It seems we’re far from the end of the difficulties that have wreaked havoc with the pillars of Wall Street. The sooner that some measure of certainty is injected into the situation the better.
