“Let them suffer”

After watching the Sunday news programs, I learned that most Americans despise the Treasury’s proposed $700 billion plan to address the illiquid mortgage related assets that are plaguing the financial system. One pundit noted that the calls are about 300 to 1 in opposition to the plan. Most of these folks are not looking for more nuance or accountability with the plan—they just want “greedy Wall Street to suffer.”

I understand the frustration---how could it be that traders, speculators, hedge funds, lawmakers and government regulators brought the US economy to the brink? The answer is as old as the Dutch tulip mania: when asset values rise, most participants across the board fall prey to greed and excesses of the cycle. Maybe the only people against the plan are those who did nothing wrong and now have to pay the price for the bad behavior of others. To those folks, this plan simply reeks and feels patently unfair.

But those same people need to ask themselves whether they are willing to live with the alternative, where the government refuses to act and makes the financial geniuses suffer their massive losses – the poor dears might have to sell those Porsches! That notion may provide some sense of satisfaction or schadenfreude to the good guys, but it also significantly raises the risk that a downward spiral could infect the broader economy.

As Joe Nocera noted in the New York Times on Sep 27, 2008, ideological opposition risks seeing the economy “go down the tubes…Henry Paulson is not what you’d call a socialist-nor is Ben Bernanke or President Bush…no deal, no credit markets…And if that happens, the consequences will be far more pressing than the failure of a Morgan Stanley or Goldman Sachs. You won’t be able to get a mortgage. Credit card rates will skyrocket. Businesses will be unable to expand and grow. Unemployment will rise. Every part of our economy depends on the credit markets…if we do not claw our way out of this crisis, the country will face a severe recession.”

For those who cling to a notion of revenge or “damn the consequences-I'm not going to allow money to go to those who screwed up,” ask yourself how you think capitalism might fare if the current panic leads to a massive downward spiral in asset prices and a further contraction in housing. If you choose to allow an economic experiment unwind in such a way, then be prepared for a multi-year recession, ala Japan in the nineties. If you vote for no action and choose to risk a life-altering hurricane instead of a bad storm, then you should be prepared for a 201(k) instead of a 401(k).

Life is not as simple as “Let them suffer,” because the suffering of others could cause devastating damage to all of us, potentially risking the entire economic and financial structure of the United States. One thing is for sure: there will be plenty of time to address the issue of who is to blame for the mess and how we can better regulate financial institutions in the future. For now, the government must deal with a US economy that is under enormous pressure and do its best to prevent it from infecting the broader economy.