Socialism for Bankers, Savage Capitalism for Everyone Else?
Compared to What?
If we were in Vienna, we would say, "We wish we could play this on the piano!"
By comparison, Detroit's latest request for a mere $25 billion bailout looks positively miserly. Can't Motor City take a page from New York, and figure out how to scare the nation into truly gargantuan largesse?
Compared to other bailouts, this is clearly by far the largest ever. For example, the total amount of debt relief provided to all Third World countries by the World Bank/IMF, export credit agencies, and foreign governments from 1970 to 2006 totaled just $334 billion ($2008), just 8 percent of all the loans. Jeff Sachs and Bono and Geldof, where is thy sting?
Back at home, the entire savings and loan bailout in the late 1980s cost just $170 billion ($2008). And the FDIC's 1984 bailout of Continental Illinois, the largest bank failure up to this year, started out as (in $2008) a paltry $8 billion, and eventually (when the books were closed in the 1990s) wound up a mere $1.6 billion as various asset recoveries dwindled in.
On the other hand, compared with countries like Norway, UAE, Singapore and South Korea that are well on their way to building forward-looking "sovereign wealth funds" to make strategic investments all over the world, the United States seems to be on a drive to create a "sovereign economic toxic waste dump."
No one has any very precise idea of just how much this bailout would actually cost, even if the $700 maximum ("at any point in time"!) were approved. This is not only because many of the securities are complex and thinly traded but also because their value is hostage to the future of the US housing market, which is still in free fall. Housing prices have already fallen by 20-32 percent in the top twenty markets since mid-2006, but as of June they were continuing to fall in eleven out of twenty major markets, especially Florida, Southern California and Arizona, where the roller coaster has been the most steep. While there analysts believe they can see weak signs of a recover, most are betting things will continue to slide well into next year.
We do know that at current T-bond rates (2-4 percent for two-to-ten-year bonds, the most likely maturities), the immediate cash cost of this bailout would be an extra $40 to $60 billion a year in interest payments alone.
Since the borrowed funds will be invested in high-risk assets, however, the most important potential costs involve capital risk. There's a good chance that, as in the case of Bear Stearns, we'll ultimately get much less than $0 .50 for each $1 borrowed by the public and invested in these assets. For example, Fannie and Freddie alone could easily be sitting on $500 billion of mortgage securities losses (=$2 trillion/$5.3 trillion times 50 percent default, times 50 percent asset recovery).
All told, on top of the interest cost, this could easily make the cost of this bailout to taxpayers at least $150 billion a year for a very long time.
No wonder traders on the floor of the New York Stock Exchange reportedly broke out singing "The Internationale" when they heard about the bailout.
But these direct financial costs of the bailout are only the beginning...
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.
|Obama's Agenda - Cost Per Year|
|New Health Plan||$50-$65||continuous|
|Health Info Reform||10||10|
|New Energy Tech||15||10|
|No taxes for seniors||7||continuous|
|Mortgage tax credit||5||continuous|
|Earned income incentives||5||continuous|
|Foreclosure aid||10||one time|
|Aid to displaced Iraqis||2||?|
|Summer ed for kids||0.5||continuous|
|National infrastructure fund||6||10|
|50% child care credit||??||continuous|
|Other education aid||18||continuous|
|Increased Army, Marines||??||continuous|
|First $4k - tuition credit||??||continuous|
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.