Socialism for Bankers, Capitalism for the Rest of Us

The financial crisis is what Naomi Klein calls ‘cry-baby capitalism’.  Things are not going as planned.  We need help.

But don’t both helping those who really need it.

This story offers a nice summary of some thoughts I’ve had recently about the series of bailouts, including those in Canada.

Because it’s listed under the author, which means it may be pushed to the bottom next week, I’ll reproduce some of it below:

Ladies and gentlemen: pardon my intemperance, but it is time for some moral outrage and perhaps a little good old-fashioned class warfare as well–in the sense of a return to seriously progressive taxation and equity returns for public investments. After all, as this week’s proposed record-setting Wall Street bailout with taxpayer money demonstrates once again, those in charge of running this country have no problem whatsoever waging "class warfare" against the rest of us–the middle classes, workers and the poor–whenever it suits their interests.

At a time when millions of Americans are facing bankruptcy and the risk of losing their homes without any help whatsoever from Washington, DC; the CEOs and speculators who created this mess; and the top 1 percent of households that owns at least 34 percent of financial stocks, along with the next 9 percent that owns 51 percent of them, have teamed up with their "bipartisan" cronies in Congress, the US Treasury and the White House to stick us with this huge bill for this bailout, plus all of the risk, plus none of the upside.

Upon close inspection, the Treasury’s proposal appears to be nothing more than a bum’s rush for unlimited power over hundreds of billions, to be distributed at Secretary Paulson’s discretion behind closed doors and without adequate Congressional oversight.

This time they have gone too far.

Some kind of bailout may indeed be needed from the standpoint of managing the so-called "systemic risk" to our financial system. However, as discussed below, the Paulson does not really tackle the true problem head on. This is the fact that many financial institutions, including hundreds of banks, are under-capitalized, and need more liquidity (net worth), not just fewer bad assets. To provide that, the plan needs to work both sides of the balance sheet, providing more capital. If private markets can’t deliver and we need to inject public capital into the financial services industry, fine. But it should only be in return for equity rewards that compensate the public for the huge risks it is bearing.

Call that "socialism," if you wish–I think we are already well beyond that point. To me, in combination with increased progressive taxation, it should really be viewed only the right way to provide fair compensation, and participation in any "upside," if there is one.

Absent such measures, progressives certainly have much less reason to support this plan. After all, the increased public debt burdens that it would impose are so huge that they could easily jeopardize our ability to pay for the entire economic reform program that millions of ordinary citizens (across both major parties) have been demanding.

From this angle, the Paulson program, in effect, is a cleverly designed program to "nationalize" hundreds of billions of dollars in risky, lousy assets of private financial institutions, without acquiring any public stake in the private institutions themselves, and without raising any tax revenue from the class of people who not only created this mess but would now be bailed out.

Any mega-bailout should come at a high price for those who made it necessary. We must make sure that most of the butcher’s bill is paid by the tiny elite that was responsible for creating this mess in the first place.

This is not about retribution. It is about insuring taxpayers are truly rewarded for the risks that they are taking–isn’t that the capitalist way? And it is also about making sure that this kind of thing never happens again.

After all, the real tragedy of this bailout is its opportunity cost. Consider how much good we could have done with a well-managed $1 trillion "matching fund" to promote new businesses and technologies in key growth sectors like energy and health–rather than what it appears we may be forced to do, one way or another, by investing more than $1 trillion trying to work out of the hole created by the chicanery-prone financial services sector.

Capitalists at the Trough

In financial terms, this latest Wall Street bailout is likely to cost US taxpayers at least $100-$150 billion per year of new debt service costs–just for starters. This estimate is consistent with the maximum $700 billion ("at any point in time!") that President Bush and Treasury Secretary Hank Paulson are requesting from Congress this week to fund their virtually unfettered ("unreviewable by any court!") "Troubled Asset Relief Program" (TARP).

The sheer scale of Paulson’s proposal implies that federal authorities must be planning to acquire at least $3-$4 trillion of mortgage-backed securities, derivatives and other distressed assets from private firms. How the Fed and the Treasury actually propose to determine the fair market value of all these untradeable assets is anyone’s guess. But since at least 30-40 percent of these assets derive from the exuberant, fraud-prone days of 2006-7, they are all likely to be subject to steep (60-90 percent) discounts from book value.

This is consistent with the 78 percent "haircut" that Merrill Lynch recently took on the value of its entire mortgage-backed securities portfolio when it sold it off to Lone Star earlier this month. Actually, in truth, it was a 94.6 percent haircut, because it only receved 5.4 percent of the value in cash.

This implies that if the federal government were required to "mark to market" their $29 billion March 2008 investment in Bear Stearns’s securities, it would now have a cash value of just $1.6 billion. From a taxpayer’s standpoint, that was certainly not a very good sign about prospects of this whole approach.

Paulson’s latest proposal would also require yet another sharp increase in the federal debt limit, to $11.313 trillion. When Bush took office in 2001, this limit stood at just $5.8 trillion By October 2007 it had reached $9.8 trillion. In July 2008, during the Fannie/Freddie meltdown, it jumped again to $10.6 trillion. Meanwhile, as of March 2008, the actual amount of federal debt outstanding was $9.82, just six months behind the limit and gaining.

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All the new $700 billion of TARP debt would be on top of $200 billion of new debt that was issued recently to buy Fannie/Freddie’s preferred stock, plus the federal government’s official assumption of risk for their $1.7 trillion of debt and $3.1 trillion of mortgage-backed securities.

It would also be addition to (1) the $85 billion two-year credit line that the Federal Reserve just extended to AIG, (2) the $29 billion "non-recourse" loan provided for the Bear Stearns deal noted above, (3) $63 billion of similar Federal Reserve lending to banks this year, (4) $180 billion of newly available Federal Reserve "reciprocal currency swap lines," (5) $5 billion of other emergency Treasury buybacks of mortgage-backed securities, (6) $12 billion of Treasury-funded FDIC losses on commercial bank failures this year (including IndyMac’s record failure in July), (7) up to another $455 billion of Federal Reserve loans that have already been collateralized this year by very risky bank assets and (8) the FDIC’s requested $400 billion of new Treasury-backed borrowings to handle the many new bank failures yet to come.

Furthermore, all of this comes on top on the record $486+ billion budget deficit (net of $180 billion borrowed this year from the Social Security trust fund) that the Bush administration has compiled this fiscal year. This has been driven in large part by the continued $12-$15 billion per month cost of the Iraq and Afghan wars and the impact of the deepening recession on tax revenues. At least the latter is only likely to get much worse. There is also the projected $1.7 trillion to $2.7 trillion "long-run" cost of these wars, through 2017.

All told, then, we’re talking about borrowing at least 1.4 trillion of various forms of federal debt, all of just to finance the various components of this year’s Wall Street bailout.

….

Hijacking the Future

Last week’s events produced terabytes of erudite discussion and wall-to-wall TV analysis by Wall Street journalists, prophets and pundits about short-selling rules, CDOs (collateralized debt obligations), "covered bonds," MBSs (mortgage-backed securities) and the future structure of the financial services. This is par for the course as far as financial journalism is concerned–the "debt crisis story," whether at home or abroad, is almost always told mainly from the standpoint of what’s in it for the industry, the banks, the regulators and investors. And once they are secure, the story disappears.

For the 90 percent of Americans who have never heard of a "CDO," own no money-market funds and own less than 15 percent of all stocks and bonds, however, this bailout means just one thing. All of the money has just been spent. And it has not been spent on you.

For example, unless the public quickly rises up and demands an increase in taxes on the rich, big banks and big corporations, as well as some public equity in exchange for the use of all this money, the costs of this bailout could easily "crowd out" almost all of the $140-to-$160 billion of new federal programs that Barack Obama has proposed.

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It will certainly make it impossible for Obama to finance his programs without either borrowing even more heavily, or going well beyond the (modest) tax increases (on oil companies and the upper middle classes) that he has proposed. Without such changes, there may be little federal money available for comprehensive health insurance or the reform of the healthcare delivery system.

There will be little additional funding for pre-school education, child care or college tuition.

There will be little additional funding for investments in energy conservation, wind or solar power.

There will no money for additional investments in national infrastructure (e.g., the reconstruction of our aging roads, highways and bridges to "somewhere.") Highway privatization and toll roads, here we come.

There will be no money to bail out the millions of Americans who have already lost their homes, or on are on the brink of losing them. The supply of housing loans and other credit will remain tight, despite the bailout. Indeed, if the economic elite has its way, the long-sought dream of "a home for every middle-class American family" may well soon be quietly abandoned as a goal of government policy. Apparently, that was the reason for all those fraudulent lending practices!

Meanwhile, the government-sponsored consolidation of the financial services industry–another side effect of the bailout–is likely to make any remaining banks, insurance companies and brokerage houses more profitable than ever. (That’s why, for example, you saw Chubb’s stock price soaring last week even as AIG was going under.) This is no doubt good news for the "owners of the means of finance." For the rest of us, however, it will just mean steeper fees and rates, and scarcer credit. And if we fail to keep up with any new charges, we’ll face the new rough justice delivered courtesy of our latest Wall Street-backed bankruptcy "reform," which was rammed through the Congress in 2005 with support from most Republicans and many top Democrats.

There will also be no money to shore up the long-run drain on Social Security or Medicare. Indeed, ironically enough, this latest bank bailout may even increase the financial pressure to privatize these comparatively successful government programs.

There will be no extra money to house our thousands of new homeless people, relieve poverty, rebuild New Orleans or support immigration reform.

There will be no additional funds for national parks. There will, however, be more homeless people dwelling–or getting evicted–from the more and more toll-intensive parks that exist.

Indeed, we might as well get used to the idea of privatizing our best national and state parks and turning them into theme parks. We can also drill for oil and gas in the Arctic National Wildlife Refuge, Yosemite, the Grand Canyon and right off the Santa Barbara coast. Perhaps the oil barons will give us an advance on all those "Drill, baby!" oil royalties.

There will be no funds available for increased homeland security. This is likely to depend increasingly on the Sarah Palin model–a .38 in the glove compartment and a Winchester under the bed.

There will certainly be no "middle-class" tax cut. Absent a progressive tax reform, the only "cut" the middle class is going to receive is yet another sharp reduction in living standards.