The great rock and roll swindle

Some harsh criticism in the nation’s press today and over the weekend of the Paulson plan to bail out Wall Street.

First, William Greider, of The Nation, bluntly explains the upshot of the Paulson plan — what he calls “the Wall Street Journal solution” — as being to “dump it all on the taxpayers.” The plan, he says,

would relieve the major banks and investment firms of their mountainous rotten assets and make the public swallow their losses–many hundreds of billions, maybe much more. What’s not to like if you are a financial titan threatened with extinction?

If Wall Street gets away with this, it will represent an historic swindle of the American public–all sugar for the villains, lasting pain and damage for the victims.

He is not questioning the need for government intervention. On the contrary, he says, the “government is not acting forcefully enough — using its ultimate emergency powers to take full control of the financial system and impose order on banks, firms and markets.”

A serious intervention in which Washington takes charge would, first, require a new central authority to supervise the financial institutions and compel them to support the government’s actions to stabilize the system. Government can apply killer leverage to the financial players: accept our objectives and follow our instructions or you are left on your own–cut off from government lending spigots and ineligible for any direct assistance. If they decline to cooperate, the money guys are stuck with their own mess. If they resist the government’s orders to keep lending to the real economy of producers and consumers, banks and brokers will be effectively isolated, therefore doomed.

Only with these conditions, and some others, should the federal government be willing to take ownership — temporarily–of the rotten financial assets that are dragging down funds, banks and brokerages. Paulson and the Federal Reserve are trying to replay the bailout approach used in the 1980s for the savings and loan crisis, but this situation is utterly different. The failed S&Ls held real assets–property, houses, shopping centers–that could be readily resold by the Resolution Trust Corporation at bargain prices. This crisis involves ethereal financial instruments of unknowable value–not just the notorious mortgage securities but various derivative contracts and other esoteric deals that may be virtually worthless.

As he points out, however, the savings and loan scandal resulted in a massive transfer of wealth as the Wall Street firms that helped finance the mess “got to buy back the same properties for pennies from the RTC — profiting on the upside, then again on the downside” — all on the public’s dime. Greider says that he suspects that “Wall Street is envisioning a similar bonanza–the chance to harvest new profit from their own fraud and criminal irresponsibility.”

However,

If government acts responsibly, it will impose some other conditions on any broad rescue for the bankers. First, take due bills from any financial firms that get to hand off their spoiled assets, that is, a hard contract that repays government from any future profits once the crisis is over. Second, when the politicians get around to reforming financial regulations and dismantling the gimmicks and “too big to fail” institutions, Wall Street firms must be prohibited from exercising their usual manipulations of the political system. Call off their lobbyists, bar them from the bribery disguised as campaign contributions. Any contact or conversations between the assisted bankers and financial houses with government agencies or elected politicians must be promptly reported to the public, just as regulated industries are required to do when they call on government regulars.

More important, if the taxpayers are compelled to refinance the villains in this drama, then Americans at large are entitled to equivalent treatment in their crisis. That means the suspension of home foreclosures and personal bankruptcies for debt-soaked families during the duration of this crisis. The debtors will not escape injury and loss–their situation is too dire–but they deserve equal protection from government, the chance to work out things gradually over some years on reasonable terms.

The government, meanwhile, may have to create another emergency agency, something like the New Deal, that lends directly to the real economy–businesses, solvent banks, buyers and sellers in consumer markets. We don’t know how much damage has been done to economic growth or how long the cold spell will last, but I don’t trust the bankers in the meantime to provide investment capital and credit. If
necessary, Washington has to fill that role, too.

Chris Hedges, in Truth Dig, was even more blunt:
The lobbyists and corporate lawyers, the heads of financial firms and the crooks who control Wall Street, all those who spent the last three decades assuring us that government was part of the problem and should get out of the way, are now busy looting the U.S. treasury. They are also working feverishly inside the Democratic and Republican parties to blunt any effective regulatory reform as they pass on their distressed assets to us. The process is stunning in its hubris and mendacity, and two of the most potent enablers of this unprecedented act of corporate welfare are John McCain and Barack Obama.

He said the bailout plan, because it “does not include robust new mechanisms of regulation, accountability and control” is likely be “nothing more than a massive taxpayer-funded bailout of stockholders and the financial industry.”

If the financial-services industry is able to suck us dry, our assets, from our homes to our retirement investments, will continue to tumble. Taxes will go up. Jobs will be lost. The grim economic indicators will get worse. The dollar, which has already lost about a third of its value against the euro, will continue to plummet. The rate of foreclosures, one in every 416 U.S. households in August, will skyrocket. Consumer spending, the engine of the U.S. economy, will continue to decline. Industrial production, which has fallen for three consecutive quarters, will fall further. Unemployment, which shot up to 6.1 percent in August from 5.7 percent in July, will get worse. These tremors presage an earthquake.

Paul Krugman, in The New York Times, points out another dangerous element of the plan — the “extraordinary power” it would bestow on the treasury secretary.

He offers a short synopsis of the economic meltdown:

1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.

2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.

3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.

4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.”

The response by Paulson, however, is unlikely to fix the damage or prevent future damage, primarilybecause Paulson is pushing a “clean” plan — i.e., “a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out.” He also wants “dictatorial authority, plus immunity from review ‘by any court of law or any administrative agency.’” All of this, he says, is a recipe for disaster.

But don’t expect Washington to back away from the Paulson plan. There are few politicians — especially the two major-party presidential candidates — who are willing to buck Wall Street.

Author: hankkalet

Hank Kalet is a poet and freelance journalist. He is the economic needs reporter for NJ Spotlight, teaches journalism at Rutgers University and writing at Middlesex County College and Brookdale Community College. He writes a semi-monthly column for the Progressive Populist. He is a lifelong fan of the New York Mets and New York Knicks, drinks too much coffee and attends as many Bruce Springsteen concerts as his meager finances will allow. He lives in South Brunswick with his wife Annie. View all posts by hankkalet