It's official! The bank bailout has not worked.
Global stock prices are in a panic rush to the bottom.
The bailout cannot fulfill its primary mission to restore investor confidence, because it does only half the job. It will provide banks with much-needed liquidity, but it does not address the compensation and management practices on Wall Street that drove irresponsible decisions and gave rise to the crisis. It does not address the void of sound leadership at the top of major financial institutions such as Citigroup and Merrill Lynch.
Since 2000, corporate profits have jumped sharply, but stock prices were down even before the subprime mess of recent weeks took them to new depths. The fact is, most of the gains have gone to private equity funds, hedge funds, investment bankers, executives who get buyouts and the financial engineers who run the deals. They put together firms, take them apart, get paid up front, extract billions in shareholder value, and then leave shareholders with depressed stock prices and vague promises about future synergies.
Worse, the wizards of Wall Street leave companies too poor to take care of their workers decently. Like George C. Scott's character in the classic Flim-Flam Man, the con artist is in the next county before the ruse becomes visible, and ordinary Americans are left with vanished dreams in their retirement accounts and prospects of a mean old age.
Sen. Barack Obama's tax-and-redistribute policies will not resurrect jobs, wages or the price of stocks in American retirement accounts. Ordinary Americans who have to earn their livings outside the cosseted confines of Wall Street will be not much better off two years from now. In fact, Mr. Obama's policies may make economic conditions worse.
However, middle-class distress gives populist promises strong appeal. If Mr. Obama wants to make Americans better off, he would serve them better by straightening out the banks and taking substantive action on the trade deficit with China. Also, he would be less politically correct on energy and the environment. His platform is full of platitudes and generalizations but not enough substance. Sen. John McCain does not offer much more, and in some cases he promises less.
House Speaker Nancy Pelosi stated last week, when the bailout bill passed, that the party is over on Wall Street - referring to compensation reforms in the new law. Those reforms are simply too weak to have meaningful effects.
Come January, the Democrats will likely control both the White House and Congress. Ms. Pelosi and other Democrats need to recognize that the problem is in the way the banks are run and to get serious about repairing the lending system.
This includes tightening regulations on mortgage brokers and real estate appraisers to ensure the accuracy and honesty that have been sorely lacking regarding essential facts such as income, credit histories and home values. Also, the reconfigured Wall Street banks will need to return to less complicated, more easily understood mortgage-based instruments.
Until these reforms happen, look for things to get worse before they get better.
Peter Morici is a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.