In the middle of a week that has seen stocks tumble precipitously, New York City Mayor Michael Bloomberg had the economy on his mind. Speaking to a packed Gaston Hall yesterday, he told the audience that the government is not addressing fundamental issues at the heart of the downturn.
“When Congress passed a stimulus package about six months ago, I got roundly criticized for saying it was like buying an alcoholic a drink,” he said. “At some point there’ll be a rally, but the problem is we’re not fixing the underlying problems.”
In the midst of financial disorder, several major companies have toppled. The U.S. government stepped in to rescue some, like Fannie Mae and American International Group, Inc., but chose to leave Lehman Brothers Holdings, Inc. and Merrill Lynch & Co., Inc., at the mercy of the market.
Bloomberg defended the bail-outs, saying that the government should ensure the security of those companies whose failure would wreak further havoc on the economy. The collapse of Lehman Brothers was unfortunate for those immediately impacted but could not rival the potential effects of a failure of AIG, he said.
But he said that bail-outs have a cost. They could give companies a sense of invulnerability by allowing them to think that, should they fail, the government will step in to rescue them. He said that intelligent discussions about which companies to save and which to allow to fail can be difficult in the political world.
Blaming politicians for promising too much and overspending, Bloomberg said that the government needs to invest in infrastructure projects that will put people to work.
“What we’re doing is we’re building infrastructure, but we’re building bridges to nowhere,” he said. “We’re spending like drunken sailors.”
The mayor argued that the crisis in the housing market has provoked financial chaos on Wall Street. Mortgages are usually secure investments because, if the loan recipient defaults, the bank can foreclose and resell the real estate, usually at a value higher than that of the original mortgage. But if housing prices fall, banks lose this safeguard.
“We overbuilt,” Bloomberg said. “Prices go down, and the people who held the mortgages all of a sudden have a problem.”
Though he said he was optimistic, he said that rectifying the fundamental problems of the financial system would involve making some people unhappy, which politicians aren’t willing to do.