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Socialism for Bankers, Savage Capitalism for Everyone Else? | The Nation

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Socialism for Bankers, Savage Capitalism for Everyone Else?

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"There's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning."    --Warren Buffet, June 2008

About the Author

James S. Henry
James S. Henry is an economist, lawyer and investigative journalist, and former chief economist at McKinsey & Co....

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If it really is time for accountability, we should start by holding banks and financial institutions responsible for their actions and not allow them to rob us again with TARP II.

There is much less to Obama's stimulus plan than meets the eye. What's he going to do about it?

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.

Summary - Potential New Federal Borrowing
Program $B Term Contents
TARP $700 5+ Repurchase Facility
AIG $85 2 Loan facility
Bear Stearns $29 Non-recourse loan
Fannie/Freddie $200 N/A Preferred stock purchase
Fannie/Freddie ?? ?? Gov. guarantee for portfolios
Other Treasury $5 ?? MBS purchases
Other Federal Reserve $63 ?? Loans to other banks
FDIC $400 ?? DIF replenishment
TOTAL $1,482

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.

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