4-02-08, 9:23 am

When Wall Street gets in over its head, the government puts up your money to bail it out. But what happens when your personal finances are at risk? Not much. 'It is clear that the sufferings of bankers excite more sympathy in Washington and in the canyons of Wall Street than do the pains of regular people,' said Doug Henwood, a journalist who writes frequently about economic issues, in a recent interview with Political Affairs.

'If I had to put it all together and lay out a scenario, I think that we are facing years of a very weak and stumbling economy that will feel to many people like an extended recession, even if it is not formally one,' he stated.

Doug Henwood is the editor and publisher of Left Business Observer and the host of WBAI's Behind the News with Doug Henwood in New York, which you can listen to on iTunes. Henwood is also a contributing writer for The Nation and the author of several books on business and economic issues, including Wall Street.

Henwood contrasted the financial crisis currently spreading through US banks like Bear Stearns to past panics in Japan and Sandanavia and to recent events in the British financial markets. In the 1990s, following a 'speculative mania' a decade earlier, argued Henwood, Japan responded slowly and improperly to a financial meltdown resulting in a long economic stagnation.

Henwood pointed out that in Japan in the 1990s, the government 'took a very long time to intervene, and where they actually imposed one of the dumbest pieces of economic pieces of economic policy making in modern times. They actually raised consumption taxes.' For these reasons, Japan's financial crisis and economic recession in the 1990s is not an experience worth repeating.

By contrast, when a crisis hit several Scandanavian banks in the early 1990s swift action fended off disaster. As Henwood put it, 'a large-scale financial deregulation which was followed by massive speculation in housing and other assets.' Scandanavian governments put up the money needed to avoid a total banking collapse.

What about the British government's response to the collapse of Northern Rock? When deregulation allowed Northern Rock to spread its financial speculation, much of it in the housing market through the purchase of suspect unregulated mortgage-backed securities, the onset of the current financial crisis produced a run on that banks. The British government responded slowly with an injection of capital to cover the bank's liabilities and followed by nationalizing it.

But according to the British newspaper Morning Star, the government's next step will be to sell off the bank's assets to the lowest bidder, handing an enormous bill to British taxpayers for an ill-conceived policy and bailout. 'I really don’t think the Northern Rock example is a terribly inspiring one,' Henwood remarked.

Henwood noted that this particular incident was a small blip on the radar screen. 'Northern Rock was a pretty small institution. It held mainly retail deposits,' he said. By contrast, the collapse of Bear Stearns, the country's fifth largest bank, would have spelled a major disaster for both US and international financial markets.

'If they had gone down, it could have taken a lot of other people with them and really created a panic situation,' said Henwood. So far, he added, the US government has made only guarantees that borrowing to prevent financial collapse will be covered. Of course, those guarantees are made with taxpayer's money, but at this point, only 'magic money,' as Henwood put it, has been put at stake.

'I think that before this is over,' Henwood added, 'it is virtually certain that we are going to see the expenditure of public money, and not just central bank money – which is to some degree 'magic money' – but real taxpayer money, real budget money.'

The response up to now, however, to the broader, more generalized economic crisis has been meager, Henwood argued. He agreed that a government response to the bank failures was necessary, but 'they are kind of holding the rest of us hostage. If the financial system implodes, it will take the rest of us down with it. On the other hand the public suffering is just not being paid much attention to.'

Wall Street has gotten used to a cycle of speculation, crisis, and bailout, mainly financed by taxpayers. Meanwhile, when economic times get tough on working families, very little help seems available, Henwood suggested.

He offered an alternative, however. 'I really think the public should get something in return for this consideration, and that means different kinds of financial institutions emerging from this,' he added. Henwood recommended 'community, nonprofit organizations – cooperative institutions that would provide basic financial services at low fees to lower and middle-income people, stay out of speculative markets.'

You'll be able to read the full interview in an upcoming issue of Political Affairs.

--Reach Joel Wendland at