The missed opportunity
When Lehman Brothers filed for bankruptcy on September 15, 2008, the presidential campaign between Barack Obama and John McCain was peaking toward Election Day on November 4. Voters told pollsters that the economy was their main issue – their debts, soaring housing costs (“wealth creation” to real estate speculators and the banks getting rich off mortgage lending), stagnant wage levels and worsening workplace conditions were what mattered. However, in the wake of Lehman, the main issue under popular debate was how much Wall Street’s crash would hurt the “real” economy. If large banks went under, would depositors still be safely insured? What about the course of normal business and employment?
Credit is seen as necessary; but what of credit derivatives, the financial sector’s arcane “small print”? How intrinsic are financial gambles on collateralized debt obligations? Remember CDOs were called “weapons of mass financial destruction” by no less than Warren Buffett. They have little to do with retail banking or even business banking and insurance, but are financial bets on the economy’s zigzagging measures.
Without casino capitalism, could industrial capitalism survive? Or had the superstructure become rotten and best left to “free markets” to wipe out in mutually offsetting bankruptcy claims?
Mr. Obama ran as the “candidate of change” from the Bush Administration’s war in Iraq and Afghanistan, its deregulatory excesses and giveaways to the pharmaceuticals industry and other monopolies and their Wall Street backers. Today it is clear that his promises for change were no more than campaign rhetoric. There even has been continuity of Bush Administration officials committed to promoting financial policies to keep the debts in place, enabling banks to “earn their way out of debt” at the expense of consumers and businesses. Read $13 trillion in government bailouts and subsidy.
History is being written to depict the policy of saving the bankers rather than the economy as having been necessary – as if there were no alternative, that the vast giveaways to Wall Street were simply “pragmatic.” Financial beneficiaries claim that matters would be even worse today without these giveaways. It is as if we not only need the banks, we need to save them (and their stockholders) from losses, enabling them to pay and retain their immensely rich talent at the top with even bigger salaries, bonuses and stock options.
It is all junk economics – well-subsidized illogic, quite popular among fundraisers.
The Obama Plan
From the outset in 2009, the Obama Plan has been to re-inflate the Bubble Economy by providing yet more credit (that is, debt) to bid housing and commercial real estate prices back up to pre-crash levels, not to bring debts down to the economy’s ability to pay. The result is debt deflation for the economy at large and rising unemployment – but enrichment of the wealthiest 1% of the population as economies have become even more financialized.
This smooth continuum from the Bush to the Obama Administration masks the fact that there was a choice, and even a clear disagreement at the time within Congress, if not between the two presidential candidates, who seemed to speak as Siamese Twins as far as their policies to save Wall Street (from losses, not from actually dying) were concerned.
Wall Street saw an opportunity to be grabbed, and its spokesmen panicked policy-makers into imagining that there was no alternative. And as President Obama’s chief of staff Emanuel Rahm noted, this crisis is too important an opportunity to let it go to waste. For Washington’s Wall Street constituency, the bold aim was to get the government to save them from having to take a loss on loans gone bad – loans that had made them rich already by collecting fees and interest, and by placing bets as to which way real estate prices, interest rates and exchange rates would move.
After September 2008 they were to get rich on a bailout – euphemized as “saving the economy,” if one believes that Wall Street is the economy’s core, not its wrapping or supposed facilitator, not to say a vampire squid. The largest and most urgent problem was not the inability of poor home buyers to cope with the interest-rate jumps called for in the small print of their adjustable rate mortgages. The immediate priorities sat at the top of the economic pyramid. Citibank, AIG and other “too big to fail” institutions were unable to pay the winners on the speculative gambles and guarantees they had been writing.
It was as if the economy had become risk-free, not overburdened with debt beyond its ability to pay.
Making the government absorb their losses – instead of recovering the enormous salaries and bonuses their managers had paid themselves for selling these bad bets – required a cover story to make it appear that the economy could not be saved without the Treasury and Federal Reserve underwriting these gambling losses. Like the sheriff in the movie Blazing Saddles threatening to shoot himself if he weren’t freed, the financial sector warned that its losses would destroy the retail banking and insurance systems, not just the upper reaches of computerized derivatives gambling.
How America’s Bailouts Endowed a Financial Elite to rule the 21st Century
The bailout of casino capitalists vested a new ruling class with $13 trillion of public IOUs (including the $5.3 trillion rescue of Fannie Mae and Freddie Mac) added to the national debt. The recipients have paid out much of this gift in salaries and bonuses, and to “make themselves whole” on their bad risks in default to pay off.
An alternative would have been to prosecute them and recover what they had paid themselves as commissions for loading the economy with debt.
Although there were two sides within Congress in September 2008, there was no disagreement between the two presidential candidates. John McCain ran back to Washington on the fateful Friday of their September 26 debate to insist that he was suspending his campaign in order to devote all his efforts to persuading Congress to approve the $700 billion bank bailout – and would not debate Mr. Obama until that was settled. But he capitulated and went to the debate. On September 29 the House of Representatives rejected the giveaway, headed by Republicans in opposition.
So Mr. McCain did not even get brownie points for being able to sway politicians on the side of his Wall Street campaign contributors. Until this time he had campaigned as a “maverick.” But his capitulation to high finance reminded voters of his notorious role in the Keating Five, standing up for bank crooks. His standing in the polls plummeted, and the Senate capitulated to a redrafted TARP bill on October 1. President Bush signed it into law two days later, on October 3, euphemized as the Emergency Economic Stabilization Act.
Fast-forward to today. What does it signify when a right-wing cracker makes a more realistic diagnosis of bad bank lending than Treasury Secretary Geithner, Fed Chairman Bernanke or other Bush-era financial experts retained by the Obama team?
Without the bailout, the gambling arm of Wall Street would have collapsed, but the “real” economy’s everyday banking and insurance operations could have continued. The bottom 99 percent of the U.S. economy would have recovered with only a speed bump to clean out the congestion at the top, and the government would have ended up in control of the biggest and most reckless banks and AIG – as it did in any case.
The government could have used its equity ownership and control of the banks to write down mortgages to reflect market conditions. It could have left families owning their homes at the same cost they would have had to pay in rent – the economic definition of equilibrium in property prices.
The government-owned “too big to fail” banks could have been told to refrain from gambling on derivatives, from lending for currency and commodity speculation, and from making takeover loans and other predatory financial practices. Public ownership would have run the banks like savings banks or post office banks rather than gambling schemes fueling the international carry trade (computer-driven interest rate and currency arbitrage) that has no linkage to the production-and-consumption economy.
The government could have used its equity ownership and control of the banks to provide credit and credit card services as the “public option.” Credit is a form of infrastructure, and such public investment is what enabled the United States to undersell foreign economies in the 19th and 20th centuries despite its high wage levels and social spending programs. As Simon Patten, the first economics professor at the nation’s first business school (the Wharton School) explained, public infrastructure investment is a “fourth factor of production.” It takes its return not in the form of profits, but in the degree to which it lowers the economy’s cost of doing business and living. Public investment does not need to generate profits or pay high salaries, bonuses and stock options, or operate via offshore banking centers.
But this is not the agenda that the Bush-Obama administrations chose. Only Wall Street had a plan in place to unwrap when the crisis opportunity erupted. The plan was predatory, not productive, not lowering the economy’s debt overhead or cost of living and doing business to make it more competitive. So the great opportunity to serve the public interest by taking over banks gone broke was missed. Stockholders were bailed out, counterparties were saved from loss, and managers today are paying themselves bonuses as usual. The “crisis” was turned into an opportunity to panic politicians into helping their Wall Street patrons.
One can only wonder what it means when the only common sense being heard about the separation of bank functions should come from a far-out extremist in the current debate. The social democratic tradition had been erased from the curriculum as it had in political memory.
Tom Fahey: Would you say the bailout program was a success? …
BACHMANN: John, I was in the middle of this debate. I was behind closed doors with Secretary Paulson when he came and made the extraordinary, never-before-made request to Congress: Give us a $700 billion blank check with no strings attached.
And I fought behind closed doors against my own party on TARP. It was a wrong vote then. It’s continued to be a wrong vote since then. Sometimes that’s what you have to do. You have to take principle over your party.
Proclaiming herself a libertarian, Ms. Bachmann opposes raising the federal debt ceiling, Pres. Obama’s Medicare reform and other federal initiatives. So her opposition to the Wall Street bailout turns out to be from a lack of understanding about how governments and their central banks can create money with a stroke of the computer pen, so to speak. (If the printing presses can work for Wall St, surely they too can for the people’s health?) But at least she was clear that bank counterparty gambles made by high rollers at the financial race track could have been wiped out without destroying the banking system’s key economic functions.
Contrasting Ms. Bachmann’s remarks to the panicky claims by Mr. Geithner and Hank Paulson in September 2008 confirm a basic axiom of today’s junk economics: When an economic error becomes so widespread that it is adopted as official government policy, there is always a special interest at work to promote it.
In the case of bailing out Wall Street – and thereby the wealthiest 1% of Americans – while saying there is no money for Social Security, Medicare or long-term public social spending and infrastructure investment, the beneficiaries are obvious. So are the losers.
High finance means low wages, low employment, low industry and a shrinking economy under conditions where policy planning is centralized in the hands of Wall Street and its political nominees, rather than in the safekeeping of more objective administrators.
 Stephen Moore, “On the Beach, I Bring von Mises”: Interview with Michele Bachman, Wall Street Journal, June 11, 2011.
 CNN Republican Presidential Debate, Transcript, June 13, 2011, http://www.malagent.com/archives/1738