It is fitting that one of the signal events of what will likely become the second Bush recession has been the Federal Reserve’s propping up of the Wall Street firm Bear Stearns.  For years, Wall Street has opposed similar bailouts of old-line manufacturing firms being swept away by the tsunami of free trade and has applauded as employers have cut their workforces, the benefits they provide, and indeed their presence in the United States.  The Wall Street mantra has been layoffs good, outsourcing better.  But when the time comes for Wall Street speculators to experience the “magic of the marketplace,” the tune has been different, with Treasury Secretary Henry Paulson saying that “I really support the Fed’s work here.”  Of course, the Federal Reserve’s bailout of Bear Stearns, followed quickly by J.P. Morgan’s acquisition of the firm, comes hard on the heels of many other federal efforts to prop up a financial sector in trouble as a result of its own avarice, including the federal bailouts for foolish subprime mortgages contained in President Bush’s stimulus package.

The economy may be heading for even more serious trouble.   Even Martin Feldstein, once President Reagan’s chief economic advisor and a very mainstream economic figure, has stated that we are in a recession, that this recession could be the worst since World War II, and that “powerful forces will continue to drive inflation higher.”  It appears that we may be headed for a return of stagflation, or something even worse.  Yet President Bush declared before the Economic Club of New York that the economic fundamentals remain “solid,” and Bush was echoed by Sen. John McCain, who, according to the Washington Post, told an audience in Philadelphia (before jetting off to the Middle East and Europe) that economic fundamentals in the United States are strong.

“Strong” is not the word most people would use to describe stagnating wages, a shrunken manufacturing base, a falling dollar, rising oil prices, record trade deficits, and massive debt financed by foreigners, but Bush and McCain have shown no indication that they recognize any of these as problems or have any idea how to deal with them.  Both Bush and McCain are free-trade zealots, even though the decline in the dollar is linked to the massive trade deficits the United States has been running year after year.  McCain wants to continue fighting a war that Nobel laureate Joseph Stiglitz estimates has cost the United States three trillion dollars—more than any U.S. war other than World War II—and appears eager to expand the war into Iran.  Fighting wars a country cannot afford is a sure road to ruin, as many empires have discovered throughout history.  McCain also wants to cripple what remains of American manufacturing with burdensome environmental regulations.  McCain’s statement to Michigan voters that the good jobs aren’t coming back to their state should be seen not as “straight talk” but as a campaign promise, a promise McCain—in thrall to both free-trade ideology and environmentalist zealotry—has every intention of fulfilling.

If Bush and McCain actually want to learn about what is going on in the economy, they would be well advised to read David A. Hartman’s “Anatomy of a Meltdown: The Subprime Mortgage Crisis” (News, April).  As Mr. Hartman notes, the subprime-mortgage crisis has grown to the extent it has because bad mortgages were sold as speculative investments, with the “commercial and industrial bankers fund[ing] the subprime mortgages through ‘structured investment vehicles’ (SIVs), which are clandestine off-balance-sheet units with no appreciable reserves.”  Under Greenspan and Bernanke, the Fed has allowed SIVs and hedge funds to grow unchecked, which has helped to build up the inflationary pressures that may soon be unleashed.  Nor would anyone who read Hartman’s article be surprised at the Federal Reserve’s solicitude for Bear Stearns: “Its top priority is the profit of the Wall Street speculators; its last priority is the preservation of the savings and pensions of the disappearing middle class.”

Hartman also notes some ominous parallels to the 1920’s, parallels that Bush, McCain, and Republican propagandists are ignoring: “In the decade leading up to the Depression, individual debt had increased 43 percent relative to disposable incomes. . . . Similarly, the decade from 1997 to 2007 saw a 49-percent increase in household debt compared with incomes, as Americans spent their money on imports and unaffordable residences.”  Hartman, though, also points a way out of an economy of debts and deficits and a declining currency: “With a bleak outlook for housing, shrinking auto production, and a declining manufacturing sector, more liquidity and deficits will, at best, result in stagflation.  What is needed are real remedies—implementing border-adjusted tax reform, reestablishing regulation of all financial institutions, reforming the financing of social insurance, closing trade and fiscal deficits, and restoring the value of the dollar as a store of value, which promotes personal savings.”

Particularly important to the health of the overall economy is the border-adjusted tax reform that Hartman has long advocated in the pages of Chronicles.  Average hourly wages in the United States have essentially stagnated in the free-trade era.  It is true that all sorts of electronic gadgets are much cheaper today than they were in the 1970’s, but such important items as healthcare and higher education are vastly more expensive.  Bread and circuses, anyone?

And our stubborn, ideological commitment to free trade means that Americans who work in sectors of the economy subjected to foreign competition will continue to see downward pressure on their wages, as U.S. wages in those sectors fall to meet the wages paid by our competitors.  Indeed, the only sectors of the U.S. economy regularly adding jobs are those sheltered from foreign competition.  Nor is there any reason to believe that those losing their jobs in manufacturing will be able to get better jobs in the information sector, despite the steady drumbeat of propaganda along those lines Americans have heard for many years now.  In fact, may experts agree that millions of additional American jobs are able to be shipped offshore in the near future, including many in the information sector.

It is true, as President Bush also told the Economic Club of New York, that the United States has recovered from all previous recessions.  We even recovered from the Great Depression.  But we emerged from the Depression with what had going in: In 1946, as in 1929, we were the world’s leader in manufacturing as well as the world’s greatest creditor nation.  Today, we are increasingly dependent on foreigners who finance our deficits and who are using their surplus dollars to buy up American assets.  Unless the reforms outlined by Mr. Hartman are enacted, we will emerge from some future recession as vassals to foreigners—and considerably less free.

        —Tom Piatak