If the Congress goes down the road I see them going down, they will institutionalize the corporate state in a way that will be severely damaging to any possibility of restoring democracy -- William Greider, in an interview with Bill Moyers
“I fear what they're doing… is setting the crown for a corporate state…. And by that I mean a rather small but very powerful circle of financial institutions… also some industrial corporations… Too big to fail… protected by (government)… The leading banks and corporations… will have the means to monopolize democracy.” – William Greider, discussing the Geithner plan to address our economic crisis, in an interview with Bill Moyers, March 27, 2009.
Oct. 13, 2009 -- It’s now been a little over a year since Congress agreed to bailout our banks, despite substantial opposition from the American people. In March 2009 our new Secretary of the Treasury, Tim Geithner, revealed plans to continue the bank bailout, which largely went into effect shortly afterwards. So how has that gone?
That depends upon whom you ask. If you listen to the corporate media you’d think everything is just fine. Typical of their opinions on this is a TV talking head that I recently heard bubbling over with praise for our economy. She mainly talked about the recovery of the stock market, concluding that this has resulted in large gains for American “taxpayers”. Taxpayers? She didn’t voice the slightest awareness that there is not a one to one correspondence between investors and taxpayers.
Actually, the banks have done quite well. But what about the rest of us?
The effects on ordinary Americans
Home foreclosures There were 106,007 home foreclosures during the second quarter of 2009 – up 17% from the first quarter of the year. When Geithner was asked why efforts to help home owners haven’t helped more of them, he responded that:
They are trying to do everything to expand mortgage help, but the problem defies a quick fix. "It is very unlikely that we will say that the housing market has got to the place in the next few months where it no longer needs help."
Well, maybe that’s because our government gave vast amounts of money to failing banks instead of giving it to those who need it most. And maybe it’s also because we have a plan where “Lenders are paid to lower a borrower's monthly payments”. Maybe the plan would have worked better if the money was given to the borrowers instead of the lenders.
Unemployment The official unemployment rate for September 2009 showed unemployment in the United States reaching 9.8%. However, it is widely accepted that the actual unemployment rate is far higher than that, when people who have given up looking for work are taken into account, or when under-employed persons are taken into account.
This graph puts the official unemployment rate into historical perspective: It rose during the Bush 41 administration, to reach as high as 8.2% in early 1993 – an important reason why Bush lost the 1992 presidential election. When Bill Clinton took over the presidency in January 1993, the unemployment rate was at 8.0%. It then consistently declined during the Clinton administration, reaching 3.7% by December 2000. It then rose, declined, and then rose again during the George W. Bush administration, reaching 8.5% by January 2008. The current official unemployment rate of 9.5% represents a modern-time high.
Jared Bernstein, Vice President Biden’s Economic Policy Advisor, in his book “Crunch – Why Do I Feel So Squeezed”, discusses the apparent paradox of a financial situation where so many Americans are doing so poorly in the presence of healthy “economic indicators”. The following excerpt applies to the “jobless recovery” of the Bush/Cheney administration, but the same principle applies to any “jobless recovery”:
Over the course of this highly touted economic expansion, poverty is up, working families’ real incomes are down…. By 2007, 44% said they lacked the money they needed “to make ends meet”…
If you feel squeezed, chances are it’s because you are squeezed. Most of the indicators that matter most to us in our everyday lives… are coming in at stress inducing levels, but GDP… keeps on truckin’. Something’s wrong, something fundamental…
The name of the problem is economic inequality… It’s a sign that something important is broken: the set of economic mechanisms and forces that used to broadly and fairly distribute the benefits of growth… unions, minimum wages… full employment… quality jobs, safety nets, and social
Economic inequality Speaking of economic inequality, Paul Krugman recently commented on the most recent income inequality statistics in the United States, saying that they “didn’t get much attention but they’re truly amazing”. The important points to observe in the graph that is contained in the link are:
Income inequality rose precipitously during the 1920s under three Republican presidents, reaching a high just prior to the Stock Market Crash of 1929, which led to the Great Depression. Numerous measures put in place during FDR’s New Deal led to declining income inequality, which reached record lows late in his presidency and remained at record lows for four decades, until they began to rise again shortly after Ronald Reagan became president. With the corporate friendly, deregulation policies of the “Reagan Revolution”, income inequality began a steady rise, interrupted by a decline during the late years of the Clinton administration, and then a precipitous rise during the George W. Bush administration, reaching an all-time high for 2007, preceding our current economic recession (or depression). With current levels of unemployment, it seems extremely unlikely that the situation has reversed since 2007. The lesson that many economists take away from this is:
Massive corporate deregulation and tax cuts for the wealthy ==> severe income inequality ==> financial collapse.
In summary, our current financial situation looks pretty good from the standpoint of corporate CEOs, but dismal for ordinary Americans.
What was the magnitude of our bank bailout?
One of the biggest problems with our bailout of the banks is the lack of transparency of the whole process. According to the Special Inspector General for the TARP program:
TARP largely remains a program in which taxpayers are not being told what most of the TARP recipients are doing with their money and will not be told the full details of how their money is being invested.
TARP was but a small fraction (roughly 4 percent) of the full $17.5 trillion (No, that’s not a typo) bailout and subsidization of the financial sector. The details of this total bailout are complicated, but the basic mechanisms aren’t beyond the average citizen’s grasp. We’re going to walk you through it.
Actually, I am not going to walk you through it, because it is too complex for me to understand (You can look it up at the link). But I’ll give you the bottom line of their article:
Given the banks’ newfound publicly sponsored financial health, Washington has little incentive to rock the boat by proposing serious reforms….
Lack of accountability seems to be something of a theme. Despite conducting themselves recklessly, compulsively, almost sociopathically, (the banks) got a lot of money to help maintain their lifestyle and assets. But what happens when they take all that money and double down on the wrong bet? Will they be back for another helping? Why wouldn’t they be? Given everything our government has said and done so far, and the meager reform ideas on the table, it’s very likely there will be another bad bet coming from the entire industry – and with it, the vaporizing of much of the assistance doled out to avoid that very occurrence.
We were warned by non-corporatist economists
As the Obama administration was considering putting the Geithner plan into effect – which was largely a continuation of the Bush administration plan – several eminent non-corporate economists warned them and us of the consequences. They used different words, but the basic message was quite similar: a reverse Robin Hood scheme, conducted behind closed doors:
The Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt… This isn't really about letting markets work. It's just an indirect, disguised way to subsidize purchases of bad assets.
In other words, this is a gift from the American taxpayers to the banks.
Krugman said that Geithner’s plan is very similar to Hank Paulson’s abandoned "cash for trash" plan, and that it won’t work. Well, that makes sense to me. How could the economic condition of the average American be improved by handing over trillions of dollars to banks? And worse yet, Krugman added:
If this plan fails – as it almost surely will – it's unlikely that he'll (Obama) be able to persuade Congress to come up with more funds to do what he should have done in the first place.
Joseph Stiglitz What Joseph Stiglitz had to say about the Geithner bailout plan was very similar to what Krugman said. He uses different words than Krugman, but the basic principle is the same:
The U.S. government plan to rid banks of toxic assets will rob American taxpayers by exposing them to too much risk and is unlikely to work as long as the economy remains weak…. The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors… Quite frankly, this amounts to robbery of the American people. I don't think it's going to work…
James Galbraith James Galbraith, the son of John Kenneth Galbraith didn’t mince words in castigating Geithner’s plan:
The plan is yet another massive, ineffective gift to banks and Wall Street. Taxpayers, of course, will take the hit… The banks don't want to take their share of those losses because doing so will wipe them out. So they, and Geithner, are doing everything they can to pawn the losses off on the taxpayer…. In Geithner's plan, this debt won't disappear. It will just be passed from banks to taxpayers, where it will sit until the government finally admits that a major portion of it will never be paid back.
Robert Reich Robert Reich, the Clinton administration’s first Secretary of Labor, also saw much similarity in the Geithner and Paulson plans (though he does say that Geithner’s plan is better). He explained how, through the actions of the Federal Reserve, Geithner’s plan could stick it to the American taxpayer for trillions:
In truth, the plan assumes trillions more from the Fed, based on the Fed's seemingly infinite capacity to backstop almost anyone putting up almost any collateral. The idea is to lure private investors into buying up the banks' toxic assets, by having the Fed limit their downside risks. If private investors pay too much, the Fed picks up the tab….
If the trillions of dollars the Fed has already committed and the trillions more it's about to commit can't be recouped, the federal debt explodes and you and I and other taxpayers are left holding the bag….
Reich noted the very poor track record of Wall Street thus far, and complained about the lack of transparency in Geithner’s plan:
The Fed is subject to almost no political oversight… They hide much of the true costs and risks to taxpayers of repairing the banking system. Those risks and costs should be put on the people who made risky bets on the banks in the first place – namely bank shareholders and creditors. Shareholders of the most troubled banks should be wiped out entirely. Bank creditors – except depositors – should take major hits. And top executives who were responsible should be canned. But Geithner and Bernanke don't want to take these steps… They think it's safer to put the costs and risks on taxpayers – especially in ways they can't see.
Dean Baker Dean Baker said this about the Geithner plan:
Treasury secretary Timothy Geithner's latest bank bailout plan is another Rube Goldberg contraption intended to funnel taxpayer dollars to bankrupt banks, without being overly transparent about the process. The main mechanism is a government guarantee that would allow investors to buy junk with a 12-to-1 leverage ratio, where they only risk the downside on their own investment, not the borrowed money.
William Greider warns that we’re on the path to a corporate state
William Greider is a political journalist who has warned us many times in the past about the dire consequences of government becoming too cozy with the corporatocracy:
This will sound extreme to some people, but I came to it reluctantly. I fear what they're doing… in their design is setting the crown for a corporate state…. And by that I mean a rather small but very powerful circle of financial institutions the old Wall Street banks, famous names. But also some industrial corporations… Too big to fail. Yes, watched closely by the Federal Reserve and others in government, but also protected by them… The leading banks and corporations are sort of at the trough, ahead of everybody else in Washington, they will have the means to monopolize democracy. And I mean that literally. Some of my friends would say, hey, that already happened…. The corporate state is here…. The fact is, if the Congress goes down the road I see them going down, they will institutionalize the corporate state in a way that will be severely damaging to any possibility of restoring democracy.
In a recent article on the subject, Greider emphasized our dysfunctional political system – especially the disproportionate role of money in politics – as a major cause of our current crisis, as well as our movement towards a corporate state. He said:
Surely the political system itself is a root cause of the financial crisis. The swollen influence of financial interests pushed Congress and presidents to repeal regulation and look the other way as reckless excesses developed….
Deepening suspicions over our current state of affairs
Greider sees hope in the rising suspicions of numerous improprieties as a major cause of our current financial crisis:
Some Wall Street players suspect that certain bailouts engineered by the Treasury and the Federal Reserve were motivated by a logic never revealed to the public. The suspicion goes like this: the strange and costly rescue of AIG, an insurance company facing bankruptcy, was really intended to save Goldman Sachs, the premier investment house. If AIG went down, it would threaten Goldman and other big holders of AIG’s collapsing derivative contracts….
Congress, and even former Federal Reserve Chairman Paul Volcker have expressed serious concerns about our current course:
The White House plan, which rearranges the boxes among regulatory agencies and puts the Fed in charge, is stalled by rising skepticism in Congress and doubts expressed by establishment figures like former Federal Reserve chairman Paul Volcker, who is particularly wary of making the “too big to fail” doctrine into a permanent assumption… Volcker asked, “Will not the pattern of protection for the largest banks and their holding companies tend to encourage greater risk-taking… especially when compensation practices so greatly reward short-term success?”
Congressional investigations into the problem
Most important, Greider sees some hope in two investigations that are currently being conducted, despite the lack of attention to the problem by our corporate media, the lack of serious reforms to date, and the apparent lack of interest by our government in addressing the problem. He discusses these investigations in his most recent article, “Memo to Investigators: Dig Deep”.
One investigation is being undertaken by the 10-member Congressional Financial Crisis Inquiry Commission, chaired by Phil Angelides. Angelides seemed optimist about the investigation in his interview with Greider. He said:
If we stick to the hard facts, we might turn up some perpetrators, but our job is to accomplish something more than that. If we pursue all the facts, we can give the American people a clear understanding of what occurred during the last twenty years or so. What forces lit the fire that led to this explosion? What exactly happened with those financial firms that failed? What happened in regulation or at the Federal Reserve? …
broke a hoary taboo this summer – unprecedented in modern times – by issuing two subpoenas to the Federal Reserve… The Fed tried to duck and dodge, but given its tarnished reputation, it complied rather than provoke a fight it was bound to lose.
Greider discusses a long series of questions that should be addressed by these committees:
Why, for instance, hasn’t the Treasury bought up rotten assets from the troubled banks after demanding Congress put up $700 billion for that purpose?...A far larger crime may lurk at the center of the crisis – wholesale securities fraud…. More important, however, is the role of financial models for creating opportunities for deliberate acts of securities fraud. That’s what investigators can examine. What did the Wall Street firms know about the reliability of these models when they sold the securities? And what did they tell the buyers?
Our current crisis in the perspective of history
History is replete with stories of the powerful attempting to maintain an iron grasp over society and its wealth and resources. In our own country we saw the effects in the Great Depression that followed the Stock Market Crash of 1929. At that time we were very fortunate to be led by one of the two greatest presidents of our history. FDR was quite aware of the effects of economic inequality and the greedy powers behind it. In his 1936 Democratic Convention speech he called them “Economic Royalists”:
Out of this modern civilization economic royalists carved new dynasties. New kingdoms were built upon concentration of control over material things. Through new uses of corporations, banks and securities, new machinery of industry and agriculture, of labor and capital … the whole structure of modern life was impressed into this royal service…
The privileged princes of these new economic dynasties, thirsting for power, reached out for control over Government itself. They created a new despotism and wrapped it in the robes of legal sanction. In its service new mercenaries sought to regiment the people, their labor, and their property. And as a result the average man once more confronts the problem that faced the Minute Man…
FDR responded with the “New Deal”, a program that provided relief to those who needed it, reversed the economic inequality that had risen to record levels during the 1920s, and made great progress towards lifting us out of the Great Depression. So successful were those policies that for several decades no successful challenge could be mounted against them. Our next Republican president, Dwight D. Eisenhower, recognized the popularity and worth of FDR’s policies in a letter that he wrote to his brother on the subject:
Should any political party attempt to abolish social security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again in our political history. There is a tiny splinter group that believes you can do these things. Among them are… a few Texas oil millionaires… Their number is negligible and they are stupid.
But few people living today remember those times. Beginning in the 1980s with the Reagan presidency, the Economic Royalists ascended again and began the dismantling of the New Deal. Greider gives a brief history of the financial aspects of this process:
Driven by Friedmanite ideology, Fed governors tipped the normal balance in favor of capital over labor, the financial sector over the productive economy. The result was numerous disorders, including the triumph of the financiers and swelling income inequality. Monetary policy became unreliable as “bubbles” inflated, followed by recession…. Debt exploded, accumulating far faster than economic growth. Instead of candidly addressing the central bank’s weakness, though, Alan Greenspan led cheers for the new order – right up to the day it collapsed….
And lastly, Greider notes that a thorough investigation is a first step towards a cure:
The investigation can restart the debate on more honest terms. Asking deeper questions about the true sources of the calamity is a first step toward developing authentic answers to the nation’s predicament.