The fragile and faltering state of American democracy.
Relatives show pictures of garment workers who are missing, during a protest to demand punishment for those responsible for the collapse of the Rana Plaza building, in Savar, outside Dhaka April 29, 2013. Reuters/Andrew Biraj
They are still digging up victims from the collapsed garment factory in Bangladesh—381 corpses and counting—while international media report the sickening details of crushed skulls and severed limbs and describe with sympathy the wildly distraught mourners searching the rubble for dead daughters. The Daka authorities arrested the greedy factory owner to save him from the mob. Sohel Rama, owner of the collapsed factory, blamed the pressures of global competition. He had no choice, he explained. Keep the sewing machines humming or else lose the contract.
If a country can’t keep wages and costs down, its production will be moved to the next poor nation willing to sacrifice its citizens in the name of economic advancement. This is what organized labor calls the “race to the bottom,” and unions have campaigned futilely for decades to stop it. Only there is no bottom, really, in the global food chain because the world has a vast backlog of very poor nations desperate for jobs and anxious to please the multinational companies that buy the cheap goods and rebrand them as J.C. Penney or Benetton or best-buy stuff at Walmart.
This is a very old story by now—these recurring tragedies of massive death for commerce. Bangladesh is getting good coverage because its carnage is likely setting new records. The grisly details will continue elsewhere for sure. Stories of thirty or fifty or 150 dead in industrial fires and other calamities are so routine, they begin to sound familiar and tiresome. We will see many more so long as fledgling enterprises in Asia and elsewhere are unwilling (or unable) to spend the modest sums required for routine safety measures.
For shame, Bangladesh. How can you people be so indifferent to human life? In America, we think life is precious. Don’t we? At least, we think American life is precious. Those strange foreigners should learn to look out for their own the way we supposedly do.
Enough of our sickening hypocrisy. Let’s drop the tear-jerk stories in American newspapers. Let us admit the cold truth about ourselves. The guilt for these distant deaths belongs to us—the self-righteous American government and morally obtuse American citizens. Not only because our people buy the stuff these young girls make in dangerous places where many of them will perish. But because the US government in Washington has the power to stop this inhumanity.
The president and Congress will not stop it, of course. That would require an admission of responsibility for what goes on in producing nations that feed our consumer culture. More importantly, it would violate our precious idea of freedom—wondrously expressed by the free market that insures prosperity and delivers the goods with good prices.
The federal government could stop these industrial scandals rather quickly by legislating rules of trade that prohibit any imported goods that are produced in barbarous conditions. This is not rocket science, as policy-makers like to say, nor without ample precedent. The so-called “free trade” system is actually a dense weave of import-export regulations that authorize government to inspect and reject goods at the border—drugs and food, for instance—if they do not comply with our standards for health and safety. A US trade restriction would require US importing companies to certify that the goods were produced in safe, sound factories. Nothing fancy, but basic terms that any modern society would insist upon for its own people. If a factory is falsely certified, the goods would be blocked from entry and a stiff penalty would fall upon the Walmarts of American commerce, not the bucket-shop operators in very poor countries.
This would reverse the incentives and begin to build a floor of decency under what the trading system allows. President Obama and US multinationals are preparing a new free-trade agreement with Asian nations, but you can be sure there is nothing in it to protect the defenseless workers in Bangladesh and other poor countries. Indeed, US trade agreements, starting with NAFTA, have concentrated on insuring the rights of capital, not labor. We do not know what Obama will propose because his negotiations are being conducted in private consultation with the multinational companies—no labor representatives have yet been allowed to see draft agreements.
The usual cheerleaders for globalization will instantly denounce this idea as a dangerous intrusion—protectionism!—that threatens free-flowing commerce. “Two cheers for sweatshops,” as The New York Times’s Nicholas Kristof and Sheryl WuDunn once declared. Yes, they would acknowledge, trade does involve some unfortunate negative qualities, but as poor nations prosper they will learn, in time, to insist on higher standards. This is the path to modern life, so best not interfere.
Actually, unregulated globalization—shorn of human sympathy and oblivious to persistent cruelties—is the road backwards. The creative tumult of our era, with its fantastic inventions and globalizing production, has reverted to ancient injustices—forms of exploitation that originated three centuries ago with the English industrial revolution. When new machines like textile looms displaced human labor, the seasoned workers were dismissed, their skills no longer valued. They were replaced in the factory by children and women—cheaper laborers without power or influence who toiled in “the dark satanic mills” first described by the English poet William Blake.
In our time, industrial capitalism has profitably employed the same exploitative routine, but with an essential difference. Thanks to global supply chains, contemporary sweatshops with dismal wages and sordid working conditions are located on the other side of the world. The people are exploited in various ways, but their cruel conditions cannot easily be seen by the American consumers who benefit from afar.
Thus, it is very difficult for exploited workers to organize meaningful protests and build the popular support needed for a reform movement. Even to attempt protests threatens workers with retaliation by the multinational companies. They can readily pack up and leave, move the factories to the next low-wage country where people and governments are desperate for jobs and income, however pitiful.
This cycle of exploitation is destined to continue until the world runs out of poor countries to exploit. Or until citizens in rich countries like the United States get over the ignorant indifference and face up to their guilty complicity with evil practices done in their name.
The interactive La Ruta dramatizes an experience that many immigrants know too well—and senators could learn from. Read Aura Bogado’s review.
President Obama discusses the federal budget at the White House. (AP Photo/Manuel Balce Ceneta)
At the start of his second term, events pushed President Obama to choose between the living and the dead. He chose dead millionaires over elderly people living on Social Security. The wealthy were given a most generous reduction in the estate taxes to be collected when they die. Social Security beneficiaries were told to live with smaller benefit checks. Instead of comforting the afflicted and afflicting the comfortable, Obama went the other way.
I asked Robert McIntyre, the celebrated reformer at Citizens for Tax Justice, what he makes of this odd presidential twist. “The Obama administration has mixed feelings about old people,” McIntyre dryly observed. “Old people on Social Security deserve smaller benefits. Old people who own estates worth tens of millions deserve smaller tax bills for their children.”
How could this have happened with a Democratic president in the White House? In early January, under pressure to make a “fiscal cliff” deal with Republicans, the president signed a new estate tax law that delivered a gorgeous windfall for those with accumulated wealth—or, rather, for their children or others who inherit the family fortunes. All rich people are now entitled to an estate-tax exemption of $5 million. That is seven times larger than the exemption that existed in the last years of the Clinton administration ($670,000) and more than double George W. Bush’s ($2 million).
Furthermore, because this new estate-tax exemption is indexed to protect against inflation, the exemption will keep growing bigger year after year. For 2012, the exemption rose by $120,000 and another $130,000 for 2013. That’s an annual inflation-driven increase of about 2.5 percent, though Social Security recipients received an increase of only 1.7 percent at the same time.
The new cost-of-living index Obama has proposed for Social Security would work in the opposite direction. It is designed to reduce Social Security benefits in future years, less than what people would get from the present calculation. The White House describes its so-called “chained CPI” as a technical fix that is good government policy.
Yet, taken together, these changes are a revenue loser for the government. The generous reductions in the estate tax will cost around $400 billion in lost revenue by not reverting to terms before the Bush II presidency worked to undermine it. The “chained CPI” fix for Social Security and other programs, including the estate tax exemption, is expected to save only about half as much as the estate tax loses—and those savings come not from the rich, but the broad ranks of working people.
Meanwhile, fewer than 4,000 very rich people will be left to pay the estate tax. This is not total victory for Republicans—they wanted to abolish the estate tax altogether—but it seems close enough. If you want to understand how the federal government drives the nation’s increasing inequality, look no further than the federal tax code.
The president is evidently having second thoughts of his own, at least about the rotten estate-tax deal he accepted. His new budget message promises to reopen that bad bargain and reinstate the estate tax exemption of $3.5 million that existed during his first year in office. Good luck with that one, Mr. President. It is hard to take his gesture seriously since the president proposes to restore the estate tax in 2018—two years after he has left office.
A more ambitious political leader would articulate and demand what he wants and what his party will insist on, regardless of whether it seems immediately achievable. Democrats are instead undercut by Obama’s sense of caution. Robert Greenstein of the Center on Budget and Policy Priorities, though supportive of Obama on the “chained CPI” issue, has wistfully cited an alternative remedy proposed by the late Robert Ball in his last years. Ball was a wise and trusted Social Security commissioner whom liberals relied on. He wrote that government could insure the permanent solvency of Social Security by raising the cap on the payroll tax deductions and by dedicating the revenue from the estate tax to keeping the Social Security trust fund in good health.
That connection between dead millionaires and retired working people could solve a lot of problems. It probably sounds too radical for Obama Democrats.
The president’s recurring problem is his softball style of governing. He begins negotiations by giving up his leverage—offering to retreat from the party’s crown jewels like Social Security or the strong estate tax Democrats traditionally defended. Then he asks Republicans to be reasonable and reciprocate. They respond by kicking him in the shins. Republicans play hardball, and with considerable success. Obama Democrats are playing badminton.
At his luxury library-museum complex, George W. Bush’s legacy lives on—without Dick Cheney and Karl Rove. Read John Nichols’s take.
President Obama speaks with reporters at the White House. (AP Photo/Pablo Martinez Monsivais)
President Obama has riled loyal Democrats by tossing Social Security onto the table in his poker game with Republicans. Not to worry. I think I know how this story ends. A year from now, when the 2014 congressional campaigns are hot underway, Republicans will be running against Obama-the-slasher and promising to protect Social Security from the bloodthirsty Democrats.
By then, having lost on his too-cute strategy, the president will be reduced to lamely reassuring old folks. Really, he didn’t actually intend to cut their benefits, really he didn’t. It was just a ploy to get tightwad conservatives to give in a little on tax increases. Republicans can pull out the videotapes in which Obama and team explain their high-minded purpose—sacrificing the Democratic party’s sacred honor in order to get Republicans to play nice.
Forget about that. House Speaker John Boehner promptly brushed off Obama’s gambit. If the president wants to whack Social Security, Boehner suggested he can do it, but don’t expect the GOP to collaborate in such a plot. “If the president believes these modest entitlement savings are needed to shore up these programs, there is no reason they should be held hostage for more tax hikes,” Boehner said.
The president set this trap himself; now Boehner will spring it on him. Does Obama not remember how Democrats lost control of the House back in 2010? The party got very little credit for enacting health care reform because the Republicans had already demonized the accomplishment as a threat to the much-beloved program of Medicare. The rightwingers promised to save Medicare from bloodthirsty Democrats by repealing Obama’s new reform program. This was all a ridiculous lie, of course, but the White House declined to call out the liars. Instead, Obama responded with flowers. This time, he is taking Republicans out to diinner.
So here is what I expect to happen. The elaborate and confusing charade of deficit politics will continue through this year and next—both parties solemnly seeking to shrink the swollen federal deficits—and distracting Washington from the real economic threat of stagnation or worse. At the end of the day, Social Security will not be cut. Nor will much else be accomplished, for good or for ill. Yes, the two parties may eventually approve some grandiose budget resolutions—official promises to cut spending drastically. But that process is usually a charade in itself with a long-established history of fiction and fantasy.
These budget promises do not become real until Congress authorizes projects and appropriates the money. The appropriators have the real power and they can change the numbers and designs and whatever else they wish. Depending on how senators and representatives feel at the time, they can embrace the promises and cut specific spending or totally ignore whatever the budget resolution had promised the public.
This is why I expect Social Security to survive the onslaught. When it gets to the money roll calls this year and next, individual members of Congress will have to swallow some big lies in order to vote for cutting Social Security benefits. First, of course, the cost-of-living gimmicks Obama has proposed will not shave a penny off the federal deficits or debt. That is because the Social Security benefits are not paid by the federal budget. They are drawn from the Social Security Trust Fund—the money paid in by working people every payday. People know this is their money, not some government handout.
So who gets tell the folks that their FiCA deductions were a joke—only an accounting fiction? The financial problems facing Social Security are easily fixed (as Obama himself has said) and are actually 30 years away. When the Congressional Budget Office is required to “score” Obama’s so-called cost-of-living reform, it will be compelled to announce that whacking the old folks contributes not a penny to reducing the federal government’s deficits.
In fact, there is an even bigger lie concealed by the fiscal scolds and ignored by witless media, too. Again and again, self-righteous critics have portrayed Social Security as the profligate monster borrowing from the Treasury and sucking the life out of federal government.
Guess what? It's the other way around. The federal government borrows from Social Security. The Treasury has been borrowing from the Social Security Trust Fund for 30 years, and the debt to Social Security beneficiaries now totals nearly $3 trillion. The day is approaching when that money will be needed for its original purpose: paying Social Security benefits to the working people who contributed to the fund.
That is the real crisis that makes the financial barons and their media collaborators so anxious to cut Social Security benefits. They would like to get out of repaying the debt—that is, giving the money back to the people who earned it. The only way to do this is cut the benefits—over and over again. Count on it. If the president and Congress succeed in this malicious scheme, they will come back again and again to cut more and more. If the politicians join this sordid conspiracy, voters should come after them with pitchforks and torches.
How much will elected progressives budge on Obama's scheme? Read John Nichols's analysis.
The Obama administration collected some crowd-pleasing headlines with its announcement that the Justice Department is suing Standard & Poor’s, the rating agency that notoriously fueled the financial crisis and crash by duping investors into buying billions in rotten securities. The government is said to be seeking a cash penalty of more than $1 billion.
That sounds good, but President Obama and his administration are stalked by a question of scandal that will not go away: Why isn’t anyone going to jail? The lawsuit’s accusation against S&P sounds like a crime. The firm, it charges, “knowingly and with intent to defraud, devised, participated in, and executed a scheme to defraud investors.” Yet federal investigators seem unable to identify any Wall Street executives to prosecute as criminals.
Why not? The popular explanation, widely shared among citizens, is that leaders of the largest banks and financial firms are given a pass because they are “too big to jail.” The public’s cynicism sounds right. It has become a momentous black mark on the Obama presidency, like a blood stain that cannot be washed away. Does the government operate two systems of justice—one for mom-and-pop criminals and another for influential titans who run the “too big to fail” banks?
These are hard cases to make, as Justice lawyers argue. But when the feds go after the mafia, they usually start at the bottom of the criminal syndicate, put the squeeze on the little thugs and turn them to testify against the big guys who called the shots. That is what financial crimes may require, too.
I have a hunch this scandal is not going away and it will gnaw at Obama during his second term. The outrage will expand as more bits of evidence keep surfacing in various lawsuits. It reminds me a little of the Watergate scandal in the 1970s that unfolded gradually, drip by drip, long after Richard Nixon had won his reelection landslide. As evidence accumulated of criminality in the White House, Nixon was stalked by a single question: What did the president know and when did he know it?
Obama is haunted by a roughly similar question: Who decided that Wall Street mega-banks and their executives must not be prosecuted as criminals for fear this might bring down the entire economy?
Potential examples of the contradiction keep piling up. The Justice Department settles lawsuits with handsome fines, but no indictments. After years of suspicion, HSBC, Europe’s largest bank, was finally nabbed for aiding drug peddlers. Its US affiliate laundered at least $880 million in dollars for Mexican and Colombian drug cartels (often driving the cash over the US border in their own armored cars). HSBC paid a fine and was given what the Justice lawyers call a “deferred prosecution.”
UBS, the Swiss banking giant, was nailed for having manipulated the London-set bank loan rate that determines what borrowers in the US and around the world must pay in interest rates. UBS settled in cash. American protesters in San Franciso are demanding a federal investigation of whether leading US banks also had a hand in setting fraudulent interest rates.
After years of ignoring accusations, some Obama officials—Attorney General Holder and Lanny Breuer, chief of the criminal division—have essentially admitted that their decisions on prosecution were directly influenced by the question of whether indictments would rattle the entire global system and maybe trigger another crash. On PBS Frontline, Breuer acknowledged that he consulted federal regulators on whether to go ahead with criminal cases. Breuer said, “If I bring a case against Institution A, and as a result of bringing that case, there’s some huge economic effect—if it creates a ripple effect so that suddenly, counterparties and other financial institutions or other companies that had nothing to do with this are effected badly—it’s a factor we need to know and understand.”
This is essentially the Obama adminstration’s “get out of jail free” card. If a mega-bank breaks the law, its leaders merely apologize and put up some money to compensate for their crime, lest the economy and other bankers suffer collateral consequences. Imagine if the government enforced its drug laws on that principle. That would empty the prisons overnight.
Non-enforcement scandals will keep piling up because—no secret really—the financial system is riddled with fraud and related crimes. As the heat rose on Justice, Breuer resigned or rather “retired” with appropriate applause from colleagues. Treasury Secretary Tim Geithner, who doubtlessly influenced forgiveness for banks and bankers, has already left office and returned to New York. Was Federal Reserve Chairman Ben Bernanke consulted by the prosecutors? Was the White House? Who said what to whom? And what did the president know?
There are many explosive questions to ask, and dismayed members of Congress are beginning to seek answers. Senators Sherrod Brown (D-OH) and Charles Grassley (R-IA) announced they will join in a thorough search, calling upon the attorney general and other high level officials to explain their decisions or rather their failure to seek justice. As more facts surface, the scandal may become politically unavoidable.
That is what happened in Watergate. Most politicians were initially reluctant to dig deeper, but eventually they realized something deeper than political scandal was involved. It was really the question of whether Americans can believe in equal justice. Indeed, that is the question now.
The Department of Justice has some dirty hands of its own. Read Greg Mitchell’s report.
Ethicist Thomas Pogge talks on global poverty. (Flickr/Pontificia Universidad)
For three decades, the Institute for International Economics in Washington has been enormously influential as an intellectual home base for globalization. The think tank is nonpartisan, but closely aligned with business and finance multinationals that provide generous funding. A few years ago, its name was changed to the Peterson Institute, honoring its founding chairman and leading benefactor, billionaire Pete Peterson, who is better known for his long-running crusade against Social Security and Medicare.
Whenever you read about the thousands of jobs promised by a new trade agreement, supporting evidence was very likely generated by economists at the Peterson Institute. The fact that these “studies” regularly turned out to be wildly exaggerated or flat wrong has not deterred experts from churning out more dubious assertions.
The debate over NAFTA in 1992 was perhaps the most notorious example. Ross Perot, the independent presidential candidate, was ridiculed and effectively discredited for calling “free trade” globalization a “giant sucking sound” that would wipe out millions of American jobs. Perot, it turns out, was right. So were American working people who complained bitterly that so-called “free trade” was hollowing out the middle class and driving down industrial wages.
The Peterson Institute, so far as I know, never confessed error—but its new leadership is implicitly acknowledging the damage and inviting critics it has long ignored into the high-brow policy discussions. It was something of a shock to attend an all-day conference at the Institute, on January 7, where twenty academic economists and policy thinkers delivered papers. The subject was “ethics and globalization.” Ethics? What’s ethics got to do with it? Quite a lot, the Institute belatedly asserted.
Indeed, some of the speakers offered policy reforms that could have been drawn from The Nation magazine. Other speakers described the global system in deep trouble and warned of popular rebellion here and abroad if things are not changed. Having lost confidence in the trading system’s promises, many are turning to national governments to save them from global capitalism.
Howard Rosen, a visiting fellow at Peterson and ex-staff director of Congress’s Joint Economic Commmittee, enumerated the negative consequences of the last generation and concluded: “To my mind, this amounts to international trickle-down economics.”
Rosen recommended a list of reforms that includes a global minimum wage, industrial wage increases linked to productivity gains, unemployment insurance, adoption of international labor standards that encourage unionization and commitments by the World Bank and other international financial institutions to require nations to accept these reforms as a condition for getting loans.
Thomas Pogge, professor of law and international affairs at Yale, added to the indictment. “Who are the beneficiaries of the last 25 years?” he asked. “Not the global poor but the global rich.” The system has generated “a tremendous concentration of wealth,” he said, created by the rich nations in league with global organizations like the World Trade Organization.
As Pogge explained, tax abuse and intra-company pricing—which allows multinationals to book income in countries with the lowest tax rates—ensure that both rich and poor countries will be robbed of wealth and resources. The subsidies paid to commodity producers like advanced agriculture in the United States ensure that they will wipe out the small-scale farmers in developing poor nations. The stringent patent rights that trade rules grant to drugs and other products create the monopolies that crush infant competitors elsewhere in the world.
Economist David Branchflower of Dartmouth spoke ominously about the “scarred workers,” both young and old, who will never recover from the lack of jobs. The working class in Europe is “smoldering,” with potential rebellion, he warned, and he said something similar may occur in the United States.
Kimberly Ann Elliot of the Center for Global Development argued for suspending all tariffs on garments imported from very poor nations as the best way to improve the horrendous working conditions at the bottom. In Pakistan, a garment factory fire in September killed 289 workers, the worst industrial fire in the history of capitalism. Walmart purchased the factory’s output and sold it to Americans, but claimed not to know it was imposing life-threatening risks on the workers.
Elliot sees little hope that multinational companies like Walmart will change these deadly practices on their own. “I don’t think the multinationals really are taking responsibility,” she said. “They are trying to protect their reputation—but fundamentally they aren’t changing their buying behavior.”
For many years, these accusations have been made against the global system—but they are still largely ignored by the multinational establishment and by the politicians who have approved the numerous trade agreements. From NAFTA to the WTO, these agreements are thick with protections for capital investors who build production in foreign countries, while the rules meant to protect workers and citizens from abusive corporations are either meaningless or nonexistent.
The Peterson Institute’s conference may signal a promising change in direction, though skeptics are entitled to doubt it. At least the debate is beginning to acknowledge inhumanities that the global establishment long ignored or explained away. Better late than never, one hopes. An old political friend told me after the conference, “This is a significant signal that will make a difference.” The message he got was that global industries must accept the obligation to pay attention to equity. By giving a platform to reform voices like Rosen and Pogge alongside the standard defenders of globalization, the Peterson Institute was inviting realism into the debate.
Peterson Institute’s new president—former Fed economist Adam Posen—may be responsible for this. He chose “ethics” as the focus for the first Institute conference since he became president. “It is a substantive intent on my part to broaden the perspectives and add to our already existing focus on distributional issues,” Posen said. “I took a strong hand in setting up the conference agenda and speakers.”
Posen knows the political foundations of globalization are in trouble. “One of the alarming effects of the global financial crisis has been the widespread erosion of confidence in capitalism itself,” Posen wrote recently. Government can change policy, he said, but only business can restore the faith by changing its own behavior.
Posten’s course correction at least offers an opening for critics. They should seize the opportunity and renew the worldwide campaign for reform principles they have been articulating for many years. People will be able to see soon enough whether the establishment’s change is real or simply an adjustment in public relations. Meanwhile, the global establishment is wobbly and vulnerable. Business is unlikely to get well politically unless it really does change.
For more on the global neoliberal consensus, read Amy Wilentz’s dispatch from Haiti in the most recent issue of The Nation.
Elizabeth Warren speaks at the Reuters Future Face of Finance Summit, March 1, 2011. (Reuters/Kevin Lamarque)
When new members arrive in the US Senate, they are supposed to take a seat on a back bench and listen quietly for a couple of years. That is not in Elizabeth Warren’s nature. She had been a US Senator from Massachusetts for only about a week when she broke with etiquette. Warren was outraged that AIG investors were urging the insurance giant’s directors to join them in a lawsuit against the federal government, claiming damages from the federal bailout of their company during the financial crisis.
The freshman senator sent out a tartly worded statement to her many fans and followers. “AIG should thank American taxpayers for their help—not bite the hand that fed them,” Warren wrote. The message swept the blogosphere like wild fire. The AIG directors folded the next day. It is perhaps mistaken to assume her voice alone stopped this corporate ingratitude in its tracks, but that may well be the message absorbed in Washington politics. Try not to provoke this new senator, especially on the stuff she knows a lot about. She might bite back.
Indeed, Senator Warren has renewed the accusation about the AIG bailout she had made a year ago during her Senate campaign. While the Federal Reserve pumped a fortune ($182 billion) into saving AIG from failure and thereby protected Wall Street megabanks from huge losses, the Treasury Department was arranging its own “sleuth bailout,” as Warren charged. Treasury granted an exception to the standard tax rules that delivered billions more to AIG in the form of a special tax break.
The company was effectively relieved from paying any taxes despite the fact that it has returned to profitability and repaid the Federal Reserve loans. The senator called on her supporters to join a campaign to end AIG’s special tax break. “Enough is enough…,” she wrote. “These special tax giveaways give AIG a competitive advantage over its competitors—all the while inflating AIG’s profit numbers and compensation for executives.”
What separates Elizabeth Warren from your typical newcomer to Congress—in addition to the rare gutsiness—is her deep knowledge of banking and finance. For many years, while she taught at the Harvard law school, Warren was a lonely crusader, exposing predatory bankers and the cruel terms by which millions of families were driven into bankruptcy.
Her reputation led to appointment as the chair of the Congressional Oversight Panel that investigated the AIG bailout in great depth. The COP final report is itself an extraordinary document of government—clear and concise, an unflinching analysis that describes exactly how the Federal Reserve and the Treasury failed to serve the public interest in their incestuous bailout of Wall Street titans.
“The AIG rescue demonstrated that Treasury and the Federal Reserve would commit taxpayers to pay any price and bear any burden to prevent the collapse of America’s largest financial institutions,” Warren’s report concluded.
She will be heard. The new senator will serve on the Senate banking committee and she already knows where a lot of the bodies are buried. I suspect some of those disgruntled AIG investors are wishing they had kept their whining to themselves.
For more on corporate accountability, read William Greider's roast of AIG shareholders.
The American International Group (AIG) building in New York's financial district. (Reuters Photo.)
Wall Street’s ingratitude is not exactly a secret. After Washington came to the rescue four years ago with the $800 billion bank bailout and ignored flagrant criminal behavior in high places, the nation’s biggest banks returned the favor with malice—an army of lobbyists to gut reform legislation, a tidal wave of political cash to defeat the Democratic president and elect banker-friendly Republicans. Leading executives like Jamie Dimon of JP Morgan Chase expressed their disdain for the meddlesome government.
The shareholders of AIG, the giant insurance company the Federal Reserve bailed out with $180 billion, have now topped that impudence. Believe it or not, these investors are suing the federal government for rescuing their company from collapse. This sets a world record for breath-taking arrogance.
The injured AIG shareholders claim the Fed violated their “property rights” by taking over their failing company, keeping it on life support with generous lending and restoring its solvency. Now those same shareholders want compensation from the government—insisting the central bank charged exorbitant interest rates on its loans and sold off valuable subsidiaries to revive the corporation.
This is like a homeowner who sues the fire department for putting out the flames when his house is burning down. The astounding details were described by The New York Times. The imaginative skills of Wall Street lawyers seem to have no bounds, and the Justice Department must now expend a fortune in lawyers to defend the government against such an improbable claim.
The legal principle invoked by the AIG investors is eminent domain, and they are urging AIG’s current management to join in the lawsuit (even though the company is running full-page newspaper ads thanking the American people for the assistance). The Fifth Amendment to the Constitution guarantees that property owners will be justly compensated if the government takes their land for public purposes—building a highway or other projects.
In this case, the protesting shareholders say their company was taken from them by the Federal Reserve Bank of New York for the public purpose of halting the larger financial crisis of 2008. Jack Gutt, spokesman for New York Fed, dismissed the claim and noted that “AIG’s board of directors had an alternative choice to borrowing from the Federal Reserve and that choice was bankruptcy.”
Yes, of course. But the AIG investors do seem to have a smaller point. They argue that the Fed’s real purpose in intervening was not to help AIG but to save the largest New York financial firms like Goldman Sachs from huge losses. Those banks were holding AIG credit instruments that were likely to become worthless, but the banks were repaid at full value thanks to the Fed lending. The incestuous arrangement provoked a bad odor at the time. If AIG had gone into bankruptcy court, those banks would have taken a big hit, too. AIG, after all, is not a bank but a business corporation. The Fed bent its own standards in order to help out some old friends.
It seems unlikely that a federal court will uphold the AIG investors’ argument, but a Washington judge has agreed to hear the case after a New York judge tossed it out. If the AIG shareholders win, it could put a severe crimp in the Federal Reserve’s capacity to do emergency lending in a larger crisis. A lot of Fed critics might cheer this, especially those who want to abolish the central bank altogether. That’s crazy itself. The Federal Reserve System is in need deep reform, but that task cannot be left to the reactionary right. After all, they want to put the bankers in charge with no meddling from government.
This week, Greg Kaufmann proposes that the Obama administration extend the access granted to big finance to a new crowd: struggling Americans.
Despite the media’s “fiscal cliff” hysteria and relentless propaganda from the monied interests, their “big lie” politics has lost. The people won. At least the people did not lose. This result is a promising sign for the political conflicts that lie ahead—another indication that “big money” does not always have its way. Liberal-labor progressives must make the most of this opportunity, mobilize folks for the next round of battles and force their progressive values upon the often ambivalent President Obama and other hesitant Democrats.
The phony drama over “fiscal crisis” was always designed to punish the wrong people for the nation’s economic ills. The establishment’s goal was to demonize the federal programs most valued by ordinary citizens, Social Security and Medicare, blaming them for Washington’s soaring deficits and debt instead of the collapsed economy that Wall Street produced. Most politicians, including President Obama, fell in line with this view. Every leading newspaper blindly accepted it as fact and blanked out contradictory evidence. How could these important people all be wrong? Because it turns out they were wrong.
Despite this supposed unanimity, the politicians choked, perhaps because they knew most citizens were not buying the lie. In the end, Congress and the president resolved the so-called crisis by not changing much and by avoiding harm to the people themselves. Pundits, take note: you lost this argument because people at large understood what you didn’t understand. After all the brave talk and scary warnings from fiscal scolds, elected politicians declined to damage the government programs that matter most to everyday Americans. The “big money” guys will be back again with the same fallacious claims, but they clearly lost this time.
The “big lie” was this: Social Security was portrayed as the great drain on American prosperity—old geezers robbing the young—but the opposite is the case. Social Security does not borrow from the federal treasury; the federal treasury borrows from Social Security. Working people pay their FICA contribution with every paycheck deduction and the money goes into the Social Security Trust Fund, where it will be used eventually to pay their future retirement benefits.
But in the meantime, the federal government borrows this money and spends it on other things—fighting wars, tax cuts for billionaires and many other supposedly public purposes. Working people know this, and they expect to get their money back. Right now, the federal treasury owes $2.7 trillion to those future Social Security recipients, but political elites think they can slyly escape this obligation by cutting the future benefits. Many working people correctly suspect they have been set up for a colossal game of “bait and switch.”
President Obama, nonetheless, has talked about doing injury to Social Security in various ways—cutting benefit checks, raising the retirement age—in the name of reducing federal deficits. Republicans have been far more duplicitous in criticizing so-called “entitlements.” In the 2010 election season, the GOP “defended” Medicare against Obama cuts. Yet in 2012 they attacked Obama for not wanting to cut Medicare more severely. The entire debate on the “fiscal crisis” has amounted to slippery double-talk.
The real economic problem is not debt. It is the sputtering economy that doesn’t create enough jobs and tax revenue. Shrinking the federal budget will make that problem worse and may make the federal deficits even larger, as Federal Reserve Chairman Ben Bernanke has repeatedly warned.
The moment of truth arrived for politicians, however, when they finally had to vote on something real and with real consequences for the folks. The elected pols lost their nerve en masse. They ducked on the hard stuff. That is the good news of New Year’s Eve. You may want to call it cowardly politics, but by defending the people’s true interests the pols have actually spared the country from worse consequences—the possibility of another crippling recession. The people can claim this accomplishment for themselves but should also thank those defiant progressive voices in and out of Congress who stood up to the propaganda and alerted the broad public to express their rage.
We might eventually learn to celebrate this moment as the beginning point for new politics—grounded in the reality of our injured condition rather than stale right-wing ideology. Instead of Republicans versus Democrats, this might become the time for Democrats versus Democrats in which liberal-labor progressives push the president and their party leftward and toward a more aggressive and ambitious agenda for rebuilding the country and the economy. The president remains surrounded by bean counters from the Clinton era who portrayed themselves as “new Democrats” moving rightward. Now the country needs new new Democrats who can revive the party’s imagination and thirst for governing.
Obama, in a sense, has been liberated by these events, and maybe that is what he has had in mind. But if he simply remains focused on the empty discussions of fiscal rectitude, his second term is bound to look stale and ultimately empty of larger purposes. Fortunately, he now faces a new Congress that includes many new players with fresh thinking and the courage to break free of the past. They can create a front of supportive dissent that pushes Obama further left than he wants to go. By rallying the public, these new Dems must oppose the president if he persists in making too compliant compromises with the corporate-financial conservatives.
The “fiscal cliff” may have established the opposite of what its original sponsors had in mind. The conservative era is over. The problem is, most politicians don’t yet get it.
For more on the fiscal cliff, read John Nichols on "Why Tom Harkin and a Handful of Other Progressives Opposed the Deal".
Forget what you read in the newspapers about the “fiscal cliff.” The real showdown in Washington is not between Democrats and Republicans. It is the bizarre collision between self-righteous politicians of both parties promising to shrink government spending and raise taxes, while the supposedly independent and nonpartisan Federal Reserve pleads with them to stop before they totally wreck the economy. What threatens to take the country over the cliff is the political momentum of the establishment’s wrong-headed propaganda.
The mild-mannered Fed chairman Ben Bernanke is standing in the way, but nobody important seems to take him seriously. Though not given to inflammatory rhetoric, Bernanke is virtually standing in the middle of Pennsylvania Avenue, waving his arms and screaming at the lawmakers. Turn back! You are heading in the wrong direction. Don’t you understand? The real economic problem is not too much government debt. It is too few jobs!
This message was again delivered by the Federal Open Market Committee at its meeting this week when it formally declared job creation as its central objective. The Fed hopes to stimulate employment by keeping interest rates near zero and pumping many more billions into the economy—at least until the unemployment rate falls to 6.5 percent. Fed officials, however, do not expect that to occur before the end of 2015.
Three more dreary years ahead, further weakening economic fiber and national spirit. The Fed chairman described the persistence of mass joblessness as “a waste of human and economic potential.” At his press conference, Bernanke allowed: “If we could wave a magic wand and get unemployment down to 5 percent tomorrow, obviously we would do that.” If Congress and the president allow the huge downshift in government scheduled for January 1, Bernanke warned: “We would try to do what we could…but I just want to again be clear that we cannot offset the full impact of the fiscal cliff. It’s just too big.”
In these circumstances, the Federal Reserve is a weak reed to lean on. It is essentially attempting to stimulate lending and spending in the private economy by altering the “expectations” of investors and business managements. By assuring those decision makers they can count on very low rates and easy money conditions for at least another two or three years, the Fed hopes this will create a bigger appetite for risk-taking. Maybe so, but skeptics are plentiful. The Fed’s extreme policy of easy money has been in place for nearly four years and it hasn’t worked yet.
After the crash of 1929, the ineffectiveness of monetary policy was disparagingly described as “pushing on a string.” Bernanke’s Fed is at risk of acquiring the same reputation.
Banks and business corporations are sitting on trillions in surplus cash and bank reserves, making handsome profits while the real economy languishes. Yet the Bernanke Fed has so far declined to take bolder actions. Financial manipulations are the orthodox response of central bankers, but real investment remains limp or nonexistent. If political leaders dared to engage genuine debate on the economy, they would embracing bigger spending plans themselves and lean hard on the Fed to take more concrete measures like direct lending to the real economy or regulatory pressures to force open the bank credit channels.
For now, the country is preoccupied with a phony crisis that might please some bookkeepers but will do nothing to jump-start a stronger recovery. The Obama administration has tried to have it both ways—devoting lots of political energy to the debt and deficit problem, not so much to the larger ailment of economic weakness. I think we are witnessing the hangover from thirty years of conservative idolatry—the political worship of so-called free markets and deregulation. Democrats are infected too—either afraid to propose aggressive measures or ignorant of what is possible in crisis. The bean counters are still in the saddle. They may be dislodged only if the country is driven into another bloody recession.
Where is big government when we need it?
For the latest on the fiscal cliff debate, check out Washington correspondent George Zornick's blog.
Believe it or not, Federal Reserve chairman Ben Bernanke has been nominated for the job by a fully certified liberal, Robert Kuttner, co-editor of The American Prospect. My old friend Bob got scores of brickbats from upset readers when he posted this idea on his Huffington Post blog. But the case for Bernanke deserves serious consideration. He has the battle experience and scars certainly as Fed chairman in crisis. Plus, he is not a banker nor dutiful camp follower to arrogant financiers.
That’s enough for me. I second the nomination.
More to the point, as the nation’s central banker, Bernanke has been a lonely dissenter among top federal officials—bravely insisting that the economy still needs greater intervention by government to create jobs and revive growth. Elected politicians, meanwhile, argue over how to subject folks to deeper austerity, more suffering. In fact, Bernanke has been making the case for jobless Americans that normally in the past is made most strenuously by liberal Democrats. The left and other citizens should rally around Bernanke’s appointment while leaning hard on our reelected president to come up with a much more ambitious economic strategy.
While the media obsesses on the “Perils of Pauline” (better known as the “fiscal cliff”), congressional insiders know the tone and direction of Obama’s second term will be known rather soon when he begins to refill cabinet slots. Geithner has promised to go home to Wall Street, where a grand career awaits his return. Larry Summers, the other architect of Obama’s disappointing economic strategy, is back at Harvard teaching, though we still face the danger that he wants to return to DC as new chair of the Fed. Other establishment names in circulation for Treasury are mostly a dreadful lot—budget director Jack Lew, former North Dakota senator Kent Conrad—because they are “austerity freaks,” more bean counters who do not grasp our economic predicament. What the country needs are people with political imagination and the courage to take some big risks.
Bob Kuttner deserves an answer from the big house on Pennsylvania Avenue. After all, Ben Bernanke is a fiendishly apt choice—a Republican conservative from the church of Milton Friedman though he has been hammered by the GOP right-wingers. A splendid choice when you think about it. And there are many more important jobs to fill. I nominate Bob Kuttner for Obama’s Council of Economic Advisors.
In the latest print issue of The Nation, Robert Borsage writes that “A ‘Grand Bargain’ on the Fiscal Cliff Would be a Grand Betrayal.”