economy – Page 36 – Hank Kalet

Bailing out the bad guys

The bailout has passed. There is rejoicing all around — well, OK. I’m being facetious.

At best, this is a flawed plan, a rather massive give-a-way to the financial sector that may have only limited psychological impact.

Even before today’s vote, there were some in the financial community who were “already wondering: What is being left out and what will have to be done next?”

The rescue package may be missing measures intended to offset shrinking bank balance sheets, free up capital for non-financial companies squeezed by the credit crisis, or prevent the possible collapse of a $58 trillion unregulated market in loan insurance policies — known as credit default swaps — written by a variety of firms, say financial experts.

Most urgently, the short-term lending system remains largely frozen, endangering the ability of everyone from small businesses to universities to General Electric to finance day-to-day operations. The financial rescue package will not fully thaw it.

“The market for commercial paper issued by a large number of corporations has essentially shut down,” said Mohamed A. El-Erian, co-chief executive of Pimco, an investment firm with about $800 billion under management.

The market for commercial paper, which companies use to borrow money, shriveled by $94.9 billion, or 5.6 percent, to a seasonally adjusted three-year low of $1.6 trillion for the week ended Oct. 1, the Federal Reserve said yesterday. With banks, insurers and other investors shying away from corporate loans, the amount of outstanding commercial paper has dropped by more than $600 billion since hitting a peak of $2.223 trillion in July 2007.

Peter R. Fisher, a former Treasury undersecretary and former senior New York Federal Reserve official, said that in buying troubled loans, the new agency created by the legislation would attack the credit crisis “indirectly . . . by trying to lighten the load on the balance sheets of the banks, but it is unlikely to do enough to change the propensity of banks to shrink their balance sheets from here to year-end.”

That means less lending by banks and tight times for Americans who need to borrow money.

And that doesn’t account for the lack of assistance to homeowners in the bailout plan.

Here is U.S Rep. Dennis Kucinich (via John Nichols, on The Nation) detailing the problems with the bailout:

Some people will ask of this Congress, what were we thinking? Why did we give $700 billion bailout to Wall Street without fixing what caused the problem in the first place? Why did we rig the free markets for security fraudsters? Why didn’t we explore alternatives to let Wall Street solve its own problems? Why didn’t we have money to save millions of homeowners, create millions of jobs, and a green economy? Why didn’t we stop the speculators? Why wasn’t there accountability? Why didn’t we take time to make an intelligent decision?

Why? Why? Why?

The Wall Street mess has obscured other bad economic news, explain succinctly by this headline from The New York Times: “U.S. Sheds 159,000 Jobs; 9th Straight Monthly Drop.”

This is a dark time, indeed.

Market meltdown is best argument against privatizing Social Security

It has always been pretty clear to me that the notion that we could fix our retirement system by handing it over to Wall Street was, well, nuts.

Taking a relatively stable and secure retirement account and opening it to the vicissitudes of the market, which may have seemed like a good time when the Dow Jones Industrial Average was spiking up through the roof, always had a dark side — one we are witnessing now as the markets crumble and major investment firms bite the dust.

And while most Americans — to their credit — oppose the plan, keeping it from gaining any real traction in the political realm over the years, despite support of it — in one form or another — from politicians of both parties. But it hasn’t died, remaining a goal of conservatives — including Republican Presidential Candidate John McCain.

Here is the language from the national Republican platform:

We are committed to putting Social Security on a sound fiscal basis. Our society faces a profound demographic shift over the next twenty-five years, from today’s ratio of 3.3 workers for every retiree to only 2.1 workers by 2034. Under the current system, younger workers will not be able to depend on Social Security as part of their retirement plan. We believe the solution should give workers control over, and a fair return on, their contributions. No changes in the system should adversely affect any current or near-retiree. Comprehensive reform should include the opportunity to freely choose to create your own personal investment accounts which are distinct from and supplemental to the overall Social Security system.

McCain had long been a privatization proponent — though his approach has changed from strict privatization to a mix of the current system and private savings accounts tied to cuts in benefits. Here is an excerpt from a March story in The Wall Street Journal (I was alerted to this by OurFuture.org):

A centerpiece of a McCain presidential bid in 2000 was a plan to divert a portion of Social Security payroll taxes to fund private accounts, much as President Bush proposed unsuccessfully. Under the plan, workers could manage the money in stocks and bonds themselves to build a nest egg and, at retirement, also receive reduced Social Security payments from the government. Proponents say the combination of the nest egg and government payouts could give a retiree more than the current system, but opponents say the change would undermine the Social Security system.

Sen. McCain’s 2008 presidential campaign Web site takes a different view, proposing “supplementing” the existing full Social Security system with personally managed accounts. Such accounts wouldn’t substitute for guaranteed payments, and they wouldn’t be financed by diverting a portion of Social Security payroll taxes.

Mr. McCain’s chief economic aide, Douglas Holtz-Eakin, a former head of the Congressional Budget Office, says economic circumstances forced changes concerning Social Security policy. Vast budget surpluses projected in 2000 evaporated with a recession, the Bush tax cuts and the cost of responding to Sept. 11.

As a result, the McCain campaign says the candidate intends to keep Social Security solvent by reducing the growth in benefits over the coming decades to match projected growth in payroll tax revenues. Among the options are extending the retirement age to 68 and reducing cost-of-living adjustments, but the campaign hasn’t made any final decisions.

“You can’t keep promises made to retirees,” says Mr. Holtz-Eakin, referring to the level of benefits the government is supposed to pay future retirees. “But you can pay future retirees more than current retirees.”

Asked about the apparent change in position in the interview, Sen. McCain said he hadn’t made one. “I’m totally in favor of personal savings accounts,” he says. When reminded that his Web site says something different, he says he will change the Web site. (As of Sunday night, he hadn’t.) “As part of Social Security reform, I believe that private savings accounts are a part of it — along the lines that President Bush proposed.”

And that’s the key line — “along the lines that President Bush proposed.” Here is what the president proposed in 2005, when he pushed hard for his version of reform:

As we fix Social Security, we must make it a better deal for our younger workers by allowing them to put part of their payroll taxes in personal retirement accounts.

Personal accounts would be entirely voluntary.

The money would go into a conservative mix of bond and stock funds that would have the opportunity to earn a higher rate of return than anything the current system could provide.

A young person who earns an average of $35,000 a year over his or her career would have nearly a quarter million dollars saved in his or her own account upon retirement.

That savings would provide a nest egg to supplement that worker’s traditional Social Security check, or to pass on to his or her children.

Best of all, it would replace the empty promises of the current system with real assets of ownership.

Hmm. “Bond and stock funds.” “Assets of ownership.” Isn’t that what has been swirling down the drain over the last month?

I don’t raise this out of the blue. The Wall Street Journal wrote about this last week and the Obama campaign has been hitting McCain on the Social Security issue of late. OurFuture.org, though, has offered the toughest critique, along with a report explaining the impact that a privatization scheme would have on retirees.

The main findings are that for future generations, Social Security privatization would:

Cut lifetime benefits by $240,264

Make 8.6 million senior citizens vulnerable to poverty.

And these numbers do not even reflect the recent volatility of the markets.

American workers shouldn’t have to face this kind of uncertainty. The cautionary tale is before us — listen to this NPR Morning Edition report on soon-to-be retirees who thought they would live off their savings and investments, but whom the experts now council to “keep on working.”

Strange bedfellows, part two

There were 25 “no” votes on the Wall Street bailout, most of whom were Republicans. But as with the Monday vote in the House, nine Democrats and one independent balked:

Maria Cantwell, of Washington
Byron Dorgan, of North Dakota
Russ Feingold, of Wisconsin
Tim Johnson, of South Dakota
Mary Landrieu, of Louisiana
Bill Nelson, of Florida
Bernie Sanders, of Vermont (the independent)
Debbie Stabenow, of Michigan
Jon Tester, of Montana
Ron Wyden, of Oregon

Here is Feingold on the bailout, from The Nation:

“It fails to offset the cost of the plan, leaving taxpayers to bear the burden of serious lapses of judgment by private financial institutions, their regulators, and the enablers in Washington who paved the way for this catastrophe by removing the safeguards that had protected consumers and the economy since the great depression,” said Feingold. “The bailout legislation also fails to reform the flawed regulatory structure that permitted this crisis to arise in the first place. And it doesn’t do enough to address the root cause of the credit market collapse, namely the housing crisis. Taxpayers deserve a plan that puts their concerns ahead of those who got us into this mess.”

And here are Sanders’ comments:

“The bailout package is far better than the absurd proposal originally presented to us by the Bush administration, but is still short of where we should be,” argued Sanders. “If a bailout is needed, if taxpayer money must be placed at risk, if we are going to bail out Wall Street, it should be those people who have caused the problem, those people who have benefited from President Bush’s tax breaks for millionaires and billionaires, those people who have taken advantage of deregulation who should pick up the tab, not ordinary working people.”

These 10 joined with 15 conservative Republicans in tilting at the Wall Street windmills.

Alabama Senator Richard Shelby, a Republican who has been a key player on banking issues and who actually had the wisdom to oppose the deregulation moves of the late 1990s that helped create the current crisis, told senator Senate were in the process of having “failed the American people” by acting hastily.

“I agree we need to do something,” said Shelby. “[But] we haven’t spent any time figuring out whether we’ve picked the best choice.”

This odd coalition defeated the bailout in the House and may again — though the so-called “sweeteners” might draw just enough Congressmen to drag the bailout to passage.

The bad bill passes the Senate,but what about the alternatives?

Ian Welsh’s piece on Firedoglake raises legitimate questions about the plan being approved, 75-24 in the Senate as I write this, while asking voters to go out and demand that Congress consider the alternatives being proposed by members of the House Progressive Caucus.

Here is his brief, but on-the-mark critique on the bailout:

On the substance of the matter at hand, of course, it isn’t much changed. Increasing how much the FDIC insures is good, but something the FDIC could have done itself at Presidential order, it has the authority (and IRAs were already insured to $250,000). As “concessions” go, that’s very very little since Obama or Bush could have just said “make it so”. Adding in letting the FDIC borrow infinitely from treasury is also good, but it’s an administrative detail, the guarantee was already there.

There’s still no bankruptcy protection for ordinary people. The treasury secretary can still spend money on any asset he wants, pay whatever he wants, sell it for whatever he wants and doesn’t have to take an equity or bond share if he does, and if does do it can’t take voting stock but must take non-voting stock. Executive compensation restrictions are a joke, just “pay a little bit more tax on your pay” and overall there’s nothing in here, nothing at all, which would stop banks from continuing to engage in the same practices as got them here. That’s insane. This isn’t even closing the barn door once the horses are all out, this is buying new horses and deliberately leaving the barn door open.

Bottom line: a bad bill which has been larded up with various legislators pet bills to get the votes necessary to pass. Everything I’m hearing says it will easily make it through the Senate. The real fight remains in the house.

As for the alternatives, he says this:

There are currently two bills being worked on in the House as alternatives to the Paulson-Obama bill. The first is the DeFazio bill, which is intended to fix the banking system by providing, not a bailout, but insolvency relief. The second is being put together by Rep. David Scott and Rep. Doggett, with the aid of economist James K. Galbraith, and is intended to help ordinary people by creating a modern version of the Home Owner’s Loan Corporation (HOLC) to take over mortgages and keep people in their homes with reasonable serviceable mortgages. Also working to turn
these bills into something that helps all Americans are Rep. Elijah Cummings and Rep. Lloyd Doggett.

Each bill by itself is incomplete, together with some work they could make a good, complete, humane solution to financial and economic meltdown which is also acceptable to enough Republicans to pass.

I want to mention the coverage of the deliberations, which has left the alternatives out of the discussion and has spent most of its time talking about the politics, the process, the game of partisan manuevering. Even liberal TV personalities like Keith Olbermann and Rachel Maddow have lost sight — to some degree — of what this bailout really is and have ceased asking whether the alternatives might work better.

Democratic critics

Donald Payne, the Democrat from Newark and one of the House of Representatives most progressive members, outlines what he thinks needs to be included in a bailout plan. According to PolitickerNJ, Payne, who voted against the $700 billion package joining 94 other Democrats, said

he would need to see significant changes benefiting low income Americans
and workers before he could support it on a second pass.

“We have not extended unemployment benefits or mortgage relief,” Payne said
moments ago in an appearance on MSNBC.

The veteran congressman acknowledged there is no question the economy is in
crisis mode, but insisted on seeing stronger bottom up measures.

“This is still in progress,” he said.

The comments from plan opponents like Payne and U.S. Reps. Peter DeFazio, of Oregon, Marcy Kaptur, of Ohio, and Steve Rothman, of Bergen County, make it clear that the supposed concensus did not break down only because of concerns from conservatives. Any bailout needs to be structured so that the prime beneficiaries are average folk.