The fragile and faltering state of American democracy.
The Washington Post published a sensational story last Sunday that claimed that Social Security is already broke. “Adding billions to US budget woes,” the headline read. Instead of piling up surpluses, as the Social Security trust fund has done for nearly thirty years, this year the system became “cash negative.” Social Security, the Post warned, “is sucking money out of the Treasury.”
This is alarming news, if true. Fortunately, it is not true. The Post committed what I call fact-filled mendacity—a pejorative mash of scary buzz words and opaque statistics that encourages readers to reach false conclusions. The newspaper’s obvious objective is goosing the so-called supercommittee whose Congressional members seem to be reluctant about whacking Social Security benefits. The formerly liberal Washington Post has long urged that as a solution to federal debt and deficits. Its ideological posture influences its reporting and also what “informed observers” think. Last night, I heard a TV anchor remark in passing, “We just read that Social Security is in the red.”
Baloney. The truth—if truth is still relevant to Washington politics—is that Social Security has never contributed a dime to the federal budget deficits. Therefore, cutting Social Security for the elderly will do nothing to relieve the deficit problem. Senate majority leader Harry Reid has made this point, so has President Obama. Not true, the Post story flatly declares.
In fact, Social Security has piled up enormous surpluses—now $2.7 trillion—which the federal government has borrowed and spent on other things, wars or highways or corporate tax breaks.
The nation’s largest creditor is not China. It is the working people of America and their employers who collectively have amassed Social Security’s huge surplus through the weekly FICA contributions required by law. This wealth is the nest egg that will pay for swelling benefits as the baby-boom generation retires. Far from being broke or “sucking” billions from the Treasury, the Social Security trust fund will continue to accumulate larger and larger surpluses during the next ten years, reaching $3.7 trillion by 2022, according to the system’s trustees.
The Post managed to concoct an opposite version by ignoring such fundamental facts and by distorting others. This has been typical of major media. Reporters and pundits mindlessly repeat the establishment propaganda that turns reality upside down. Social Security is not a source of the deficits, as you have read so many times, but a giant savings program that actually helps offset the effects of the government’s red ink. Editors or reporters are too lazy (or dim-witted) to dig into the accounting complexities and discover that elite wisdom is bogus.
The Post started with a fact that is not news and already widely known. With the deep recession, Social Security revenue dropped sharply because so many millions are unemployed. If you wish to blame this problem on Social Security, why not also blame it on the Pentagon which really contributes big time to federal deficits? With reduced revenue, the cost of paying out Social Security benefits in 2011 will slightly exceed (by about $46 billion) the trust fund’s income from FICA payments. Evidently this is what the Post meant by “cash negative.” That’s not a term Social Security trustees use and does not quite mean what the Post implies.
In fact, Social Security’s total income, if you include the interest payments it routinely receives on the trillions already lent to the federal government, does cover all of this year’s payouts (with a surplus of $70 billion left over). So Social Security did not “suck” any money out of the Treasury except what it was already owed as the leading lender to the federal government. To suggest that these billions in interest payments somehow add to the federal deficit is like blaming the deficit on China because it also collects interest on its Treasury bonds.
The Post compounds its distortion further by complaining that the Treasury had to pay $106 billion to the Social Security trust fund to replace the revenue it lost when Congress and President Obama enacted a one-year reduction in the FICA payroll tax. One notes that the Washington Post editorial page endorsed this measure as a good and proper way to stimulate the economy.
Defenders of Social Security (including myself) objected that suspending the payroll tax would undermine the long-term solvency of Social Security unless the government replaced the lost revenue. Congress agreed. It ordered Treasury to replenish the trust fund, dollar-for-dollar. The Post complains now that another $267 billion will be required if Congress enacts Obama’s proposal to expand the payroll tax holiday. This spending, one can argue, did indeed add to the federal deficit. But why blame Social Security and punish Social Security recipients when the deed was done by the President and Congress, egged on by the Washington Post?
Surely, you see the point. Social Security is a stand-alone program financed by its own revenue stream, not by other tax sources. It has always operated that way. The ordinary people who pay in their FICA deductions are the beneficial owners of this wealth, not the Treasury. Fortunately, people at large understand this, even if Washington elites do not. That’s why politicians are a little leery about pullng this swindle on the old folks.
The Washington Post has a popular feature called “Fact Checker” that vets the accuracy of campaign rhetoric made by the presidential candidates. I suggest the newspaper turn this matter over to Mr. Fact Checker and let him decide who’s telling the truth.
At the midnight hour, when financial-market wise guys were predicting disaster, Europe’s political leaders proved to be stronger and braver than America’s. The big nations of the EU worked out a deal to resolve their financial crisis that does what US politicians, including the president, lack the nerve to pursue. The Europeans are whacking the bankers big-time.
Yes, the sovereign governments of Europe have to put up more billions to rescue debt-soaked smaller nations like Greece. But the bankers who lent all that money will be compelled to share in the pain—a 50 percent write-down on the sovereign-nation bonds they are holding. Ouch.
This may be the beginning of wisdom—forgiving debts that in any case will never be repaid. That giant step should give Europe a clean start for economic recovery. It’s a much smarter alternative than imposing perpetual austerity on people who are already broke.
American politicians are not there yet, not even close. Republicans are manning the barricades to defend the bankers on everything, even the most modest reform measures. The Obama administration is tinkering around the edges with small-bore adjustments that won’t accomplish much.
Rhetoric notwithstanding, Obama is still shielding the largest banks—the Wall Street Six—from the consequences of their own recklessness. The biggest US banks are still holding a lot of debt paper, especially mortgage-backed securities, that has effectively failed but is still booked as okay assets. Federal regulators could pull the plug on these illusions and force an honest accounting but are afraid to hurt big guys who are already fragile. Until debt reduction is undertaken in a major way, especially for home mortgages, American recovery is going to be an on-and-off-again affair. (See my article, “It's Time for Debt Forgiveness, American-Style,” in this week's issue of The Nation.)
The European crisis differs from the US version in this respect: the EU debt is held by national governments while America’s failing debtors are largely private citizens—especially homeowners stuck with “underwater” mortgages they cannot pay. Obama announced a small but helpful step this week—the administration will loosen some rules and make it easier for those he calls “responsible homeowners” to refinance their mortgages at a lower interest rate. The president also is relaxing the repayment rules on college loans.
By White House estimates, the mortgage refinancing might help as many as one million families. But that’s out of the 11 million sliding toward failure and foreclosure. A good thing to do, surely, but not an answer to the bleeding economy.
As the European crisis plays out, it will be a good test pattern for American politicians to watch. If the principle of debt reduction is as important as some experts believe, the bold action in Europe should clear the way for Europe’s economic recovery. Right now, some Wall Street cheerleaders are blaming Europe for our problems. If Europe gets well and the United States remains stagnant, the apologists will have to invent a new excuse.
The reporters and pundits have been surprisingly respectful, withholding the usual cynicism. They did not jeer and make weak jokes. Still, they couldn’t resist pointing out the incoherence of this motley crew “occupying” Wall Street. What is the agenda? They asked around and duly reported that no one seemed to know. Yes, this is a charming scene, the artists and hippie types gathered in the public square, but still it must be said: they have no agenda!
Let me help the brothers and sisters of the fourth estate. It’s humanity, stupid! That is agenda enough and it is expressed clearly (even existentially) by the gaudy, loving presence of these noble citizens who have seized Liberty Park as their own free space, just up the street from the New York Stock Exchange.
Correction: Liberty Park is now Zuccotti Park, which the real estate developer who bought the land renamed after himself. Doesn’t that pretty much say it? The egotism of capital has obliterated the softer values and virtues of labor and everyone else—anything that got in the way of the engine of modern capitalism. It is not just the millions of innocents who have been trampled by the profit-harvesting machine. The Wall Street guys and their lackey economists even captured the political culture and corrupted its meaning.
Human sympathy is out, even embarrassing to mention. It sounds weak when the hard-boiled subject is how to improve on profit-making progress. Among political elites, bleeding-heart consideration for the fate of humankind is considered dangerously sentimental, even subversive to good public order. It gets in the way of the hard facts of banking and business, it skews the cost-benefit analysis of what folks want versus what the system will allow. A decent consideration for humankind—that’s what has been expelled from respectable political debate. That’s all citizens want to talk about in Liberty Plaza.
The wisdom of those young people (and old people) who planted their flag in Wall Street is in recognizing that the first step is not drafting policy manifestos for government (government is itself brain-dead, by the way). The essential first step is liberating the minds of people themselves—people everywhere who have been intimidated and abused by the Central Ministry of Official Propaganda. Giddy celebration of self-respect—that is what they are selling at Liberty Park. And it truly is subversive. If the word spreads, if there are 500 or 1,000 liberated public spaces around the country, then we can start to talk about politics or issues. The first lesson they are teaching us that democracy should be fun.
In olden days, when the Democratic Party was liberal and populist, it was the Dems who bashed the Federal Reserve. When the Fed pushed up interest rates to drive the economy into recession, Democrats would tell the central bankers: get off the backs of the working people. Now it is the Republicans complaining, the party of money. The GOP leaders demand that the Fed do—what?—do nothing. Nothing at all to help the wounded economy.
It sounds dumb, except Republicans are figuring folks won’t figure out their real purpose (shivving Barack Obama). They assume attacking the Fed is cost-free in our deranged politics, and they are probably right. Who wants to stand up for the mysterious agency that dispensed those many trillions to distressed megabanks with no strings attached? On the far, far right, there are adherents to dark theories that the Fed was created by the Rothschilds and is owned by the Gnomes of Zurich.
Democrats turned respectable and have nothing to say to the monetary policy-makers besides urging them to do the right thing, whatever that is. The party has lost its sense of direction on so many important issues—we rely on Senator Bernie Sanders, the socialist, to stand up for truth and justice.
The right-wingers are attacking the central bank’s chairman, Ben Bernanke, for a very modest gesture toward stimulating the dead-man-floating economy—buying more long-term Treasury bonds to bring down interest rates. Senator Sanders blamed the Fed—correctly—for not doing enough. That line should be the drumbeat for Democrats, both to counter the Republican bullying and to force a debate on more aggressive monetary policy.
The Fed “twist”—selling short-term loan paper to buy long-term—greatly disappointed Wall Street because the traders were hoping for much more. They want the Fed to descend with a miraculous rescue for them, the kind Alan Greenspan used to deliver when stock prices were crashing. Greenspan’s soft-hearted regulation is what got the country into this mess.
Bernanke is at least trying to dig out. Give him that. His remedy will have very little impact on economic activity, for an obvious reason—interest rates are already very low, near zero for short-term paper, only 4 percent for long-term borrowing. That is not the reason people aren’t buying houses or banks aren’t lending to small businesses. The system has tanked. Reviving it will require truly radical measures—too radical for conservatives like Bernanke and probably for liberals like Obama.
This can change abruptly. Right now, the fever is rising in financial circles, a renewed anxiety that another huge crash may be near, the kind of event that renews the banking crisis. If this occurs, it will give the right-wingers more ammunition for Fed bashing. Cooler heads will recognize that calamity can generate the political will for a profound shift in governing strategies, for the kind of radical measures so far avoided by both parties. Someone wake up the Democrats.
The word is out in Washington. When the president announces his deficit-reduction proposals next week, he will definitely not suggest any hit on Social Security nor any increase in the eligibility age for Medicare. That’s a small victory for reason and social equity. We can thank the voters of Brooklyn’s 9th Congressional District who this week elected a Republican representative for the first time in nearly ninety years.
The White House spin claims this off defeat has nothing to do with Barack Obama, but that’s tripe. Working politicians know better. The Brooklyn special election was an ominous rebuke to the president, suggesting he may be heading into Jimmy Carter territory. Despite official denials, Obama may be getting the message. At least the White House leakers were busy spreading the word to major media that Obama has dropped any intention of of whacking Social Security or Medicare eligibility in order to entice Republicans into some sort of grand compromise.
Congressional Democrats have felt a stabbing pain in the back whenever the president talked about “entitlement reform.” The Dems hope to run against the Republicans next year on those very issues—defending the great liberal social programs against cut-throat Republicans. Obama was threatening to throw away their best cards. They don’t have many others, given the stalled economy, flirting with recession. The president’s new job-creating plan is thin gruel. Even if Republicans allowed the legislation to pass (which they won’t), it won’t do much to stop the bleeding. Most Democrats pretend to be thrilled anyway. Privately, they have a scary, sinking feeling.
Life is unfair, so is politics. What happened to Jimmy Carter in the spring of 1980 was that fellow many Democrats concluded his presidency was doomed and so they concentrated on personal survival. Many ran campaigns that emphasized their own accomplishments and never mentioned his name. Others actively ran against their own incumbent president (with limited results). Carter’s people kept saying, not to worry—the people will never elect a right-wing kook like Ronald Reagan as their president. The rest is history, as they say.
Obama is not helpless. He could change the game again and more dramatically by employing the presidency’s vast discretion to launch new government policies on his own, while running hard against the “party of no.” It’s true neither Obama nor his advisers are inclined toward aggressive unilateral action, and they are fast running out of time. But other Democrats should keep banging on him, less politely and more publicly than they have so far. Brooklyn’s Ninth District might be his last wake-up call.
Elizabeth Warren’s problem is not with the Republicans—though they have worked hard to demonize her. Her real problem is with the “boys” at the Treasury Department and Timothy Geithner, the head “boy” in charge of the president’s banking policies. Maybe she also has a problem with the “boys” at the White House. We are soon to find out. In the next month or so, Barack Obama must decide whether or not he will appoint Warren to chair the new Consumer Financial Protection Bureau.
This ought to be a slam-dunk for him. After all, Elizabeth Warren invented the idea of a new regulatory agency to protect hapless consumers from predatory bankers. Obama embraced the concept as his own and it is one of his few distinctively original accomplishments. Warren knows consumer fraud. For many years, as a savvy reform critic, she courageously called out the banking industry on its most notorious practices. Her dynamic and plainspoken advocacy was essential in getting Congress to include the proposal in the financial reform legislation enacted last summer.
Yet Obama hesitated. For nearly a year, he has played coy and held off naming her to the job. We presumed that was because Republicans vowed to block her nomination unless the law is altered to weaken the CFPB and appease angry bankers. But that explanation doesn’t add up. Obama could always put her in the office through a recess appointment that gets around Senate confirmation. Yet he didn’t do so. What’s up with that?
Put aside the usual partisan bombast. I asked a Very Reliable Source to provide the inside skinny and this is what he told me: “All this is really about is the boys don’t want to have an independent woman in their clubhouse.” When I recounted this remark to my wife, she said, “What else is new?”
Tim Geithner, said my Very Reliable Source, really, really doesn’t want Elizabeth Warren in the position where she is sure to be a tough-minded and independent voice on major financial-policy issues. As CFPB director, Warren would also sit on the new “systemic risk” council of regulators who decide very large questions like “too big to fail.” The other regulators can outvote her easily enough, but Warren has an alarming history of personal candor. She says what she thinks, out loud and in public. That naturally disturbs the club members, all of whom have a rank history of making life easier for the big boys of banking.
Warren made her integrity clear when she served as chair of the Congressional Oversight Panel digging into the financial crisis and bailouts. Her investigations turned up alarming facts the bankers and bank regulators wished to avoid. Furthermore, Warren was often dissenting on legislative issues Geithner and team were pushing in the congressional debates on financial reform. Geithner doesn’t tolerate contrary thinkers in his midst; witness the galaxy of Wall Streeters he recruited to run the Treasury department. Geithner is a favorite of the president’s, perhaps because he is absolutely faithful to the financial establishment’s best interests.
So what does Obama really think about all this? Despite his eloquence, the president is adept at not revealing that. The VRS doesn’t know either, but thinks the rise of Elizabeth Warren created a dilemma for Obama. He genuinely admires her work and character. But he really, really doesn’t want go against his Treasury secretary and other close advisors he relies upon. Obama’s new chief of staff is the man from JP Morgan Chase. William Daly says he has recused himself on these matters. Does he leave the room when Warren’s name comes up in the Oval Office?
Obama repeatedly pushed the question off, hoping things might change and resolve it for him. He added Warren to Treasury as the principal organizer staffing the new consumer bureau. She has evidently done a good job -- another reason Republicans keep attacking her. Being against Warren helps GOP fund-raising, but then Obama is also heavy into fund-raising himself. Maybe he postponed a decision on Warren so he could harvest more Wall Street money. The administration approached other notables about taking the job, but everyone turned it down. In Democratic circles, this job belongs to Elizabeth Warren and nobody dares to jump ahead of her. Lately, political operatives are suggesting she should run for senator in Massachusetts – another ploy by the big boys to show this girl the door.
Ultimately, Obama has to decide. The question is no longer about financial reform or even politics. The question is whether this president has the nerve to include a smart, tough woman who thinks for herself on his governing team. If the answer is no, he will pay dearly for the cowardice.
My bottom line on Friday's debate: Barack Obama failed to step up to the historic moment. He made perfunctory remarks about the massive banking bailout facing the political system, but he decided not to speak to the American people with anything resembling forceful honesty and clarity. McCain wasn't any better. Both men faced a gut check in their campaign and both of them flinched.
The explanation, I suspect, is that Barack Obama and John McCain know they are going to wind up voting for this outrageous package, probably sometime next week, so why pretend to be thinking independently? McCain had flirted with the idea that he could speak for the public's anger and reap big benefits for his troubled candidacy. Someone advised him not to go down that road. He folded.
Obama has offered critical comments on how the bailout should be redesigned for greater equity, but it seems clear he won't press the point. Left-labor groups are pushing Democrats to address the burdens of indebted Americans and the swooning economy with substantive measures. But party leaders are resisting - reluctant to slow down the bankers' bonanza with complicating issues.
Obama is standing on the establishment's side. In governing circles, this is portrayed as the "responsible" position. Responsible to whom?
Obama has real leverage in this political drama, but declines to use it. He's not president yet, just a young senator from Illinois. Why stick his neck out? If Barack Obama does become president (and I hope so), I predict he will come to regret that he missed this moment to be his own man..
The 2008 election has many unusual aspects, but none is more bizarrethan the sorry spectacle of the bailout for Fannie Mae and Freddie Mac.
American voters are like the lambs being led to slaughter and at thevery height of the presidential campaign. Yet not a peep of protest fromJohn McCain and Barack Obama, not even a hint of the righteous angerinjured taxpayers will rightly feel as they figure out the deal forthemselves. The rescue of the two giant mortgage firms is another hugeexpenditure of the public's money--one or two hundred billion dollarsthis time--to reassure bankers and financiers the government stands bythem in their troubles, whatever the costs.
Think about it. Candidates Obama and McCain are wagging theirfingers at the governing system in Washington, both warning they intendto make big changes if elected. Meanwhile, business-as-usual doesn'twait for the next president. The financial system needs the capitalright now, and so Treasury Secretary Henry Paulson has opened up the spigot. Obama and McCain meekly bless the deal. This sequence of events makes themlook look the political goats, their grand talk of change pushedaside by what Wall Street demands. The 2008 election may be close, butit looks like the status quo has already won.
There is a lot more pain and embarrassment to come. The nation is in themidst of an historic financial crisis--more bank failures are ahead andprobably another bailout of even larger scale. Yet the two major partiesact as though this subject is too complicated for ordinary Americans tounderstand. Neither candidate has found the nerve (or decency) toexplain the full dimensions of what the country is facing. Both men areno doubt told to say as little as possible, for fear of touching offmore panic among investors. Voters can safely be left in the dark.
Facing the crisis honestly would not fit very well with the flag-wavingcampaign themes. The United States is financially busted and utterly dependent onlending from foreign powers--both friends and rivals around the world.The government rescue of Fannie Mae and Freddie Mac could not be put offuntil after the election, as insiders had hoped, because foreigncreditors were beginning to back away from lending any more capital tothe two failing US firms. The major creditors are led by China, Japanand other Asian nations, plus oil-rich Arab states and even Russia. TheBank of China has reduced its $376 billion in lending to Fannie andFreddie by 25 percent since July and other nations threaten to do thesame.
So the Treasury arranged a deal that throws Fannie and Freddieshareholders over the side, but promises to protect the creditors,foreign and domestic. Bill Gross, chief investment officer of PIMCO, themammoth bond house in California, issued an ominous warning in advance.If Washington didn't "open up the balance sheet of the US Treasury" andpump lots of public money into the ailing financial firms, the majorlenders would sit by and let the great deflation of Wall Street proceed to its ruinous climax. Without the big lenders, credit would dryup through the US economy and the destruction could prove bloodyhistoric for all. The Treasury Secretary heard the message.
How much more capital does Wall Street need to get well? Maybe as muchas $500 billion, some experts estimate. What's frightening is that eventhat great amount might not provide a cure for anytime soon for the realeconomy, where unemployment rises along with mortgage foreclosures.Thus, Washington puts up unlimited billions for financial repair, buthas been rather penny-pinching about paying for economic stimulus aimedat work and production. Obama now proposes a new stimulus package, butthe pitiful sum of $50 billion. McCain talks up more corporate tax cuts.
If Americans had a functioning democracy, both of these guys would becompeting furiously to get real.
The news was so stunning I refused to believe it until I saw John McCainon the TV screen announcing his pick for Vice President. There's no needto disparage Sarah Palin. She's seems like a smart, serious person. Butwhat the choice reveals about McCain is devastating with a capital D forDesperation.
Within forty-eight hours, all America will be talking about her. What people willsay is, "You mean, if John McCain croaks, she becomes our president?"Gasp, yes. That is what McCain has decided. So much for "experience" andwise judgment as a campaign issue.
The Senator was widely thought to be on the fifty-yard line, nose to nosewith Barack Obama. But this selection reveals the Republican campaignstrategists knew better. Picking the obscure and under-experiencedgovernor from Alaska for veep means McCain and his people recognize theyare in a very weak position for the fall campaign. So weak they decidedto throw a forty-year Hail Mary pass and hope audaciously for a luckycatch.
It won't succeed. In fact, I expect this gambit is going to drive farmore voters to Obama's column than it does for McCain.
Choosing Palin kills the "experience" argument. Republicans must haverecognized from their own market research that it wasn't working forthem. For two months or more, McCain and his handlers have smeared andslandered Obama, mocked his star quality talents, belittled his lack oftenure in Washington back rooms and accused him of unpatriotic egotism.Clearly, their internal polling told them this line of character attackwasn't grabbing the public. Playing the wise old man was not going to beenough to overcome McCain's other significant handicaps, his somewhatdoddering style and memory lapses, his deadly embrace of right-wing cantand G.W. Bush.
So, what the hell, let's take a wild shot and see what happens. Theother veep possibilities are dull guys in good suits. Let's go with theyoung gal from Alaska. She's not only a woman--she's a mother! You wanthistory-making? We Republicans can do history-making.
Their internal logic was obvious, it was also pathetic. Putting a womanon the ticket is supposed to draw away those discontented Clinton votersin the Democratic party. Not going to happen, I think. First, that grouphas dwindled considerably in the last few days--thanks to HillaryClinton's straight-shooting endorsement of Obama and especially to BillClinton's brilliant blessing. The former President went the full mile indefending Obama as ready to be President by reminding everyone that hetoo had been dogged for a youthful lack of experience. Any remainingbitterness among Clinton voters will not be salved by supporting ahardcore right-winger on feminist issues.
The early returns I am hearing from people suggest that McCain's gambitmay prove to be a home run (mixing my sports metaphors) for Obama. Oneyoung friend first heard the news from his mother who called to say,okay, she was switching to Obama. For months, she had rooted for Hillaryand insisted Obama was too wet behind the ears. "You can stop arguing withyour mother," she said.
Palin's previous political experience was as mayor in a town of 6,000.Did they mention this to John McCain? Or did he perhaps forget? Senator McCain says he has seasoned judgment, but he may have been over-cooked.
Phil Gramm, the senator-banker who until recently advised John McCain's campaign, did get it right about a "nation of whiners," but he misidentified thefaint-hearted. It's not the people or even the politicians. It is WallStreet--the financial titans and big-money bankers, the most importantinvestors and worldwide creditors who are scared witless by events.These folks are in full-flight panic and screaming for mercy fromWashington, Their cries were answered by the massive federal bailout ofFannie Mae and Freddy Mac, the endangered mortgage companies.
When the monied interests whined, they made themselves heard by dumping the stocksof these two quasi-public private corporations, threatening to collapsethe two financial firms like the investor "run" that wiped out BearStearns in March. The real distress of the banks and brokerages andmajor investors is that they cannot unload the rotten mortgagesecurities packaged by Fannie Mae and banks sold worldwide. Wall Street's preferred solution: dump the bad paper on the rest of us, the unwitting American taxpayers.
The Bush crowd, always so reluctant to support federal aid for merepeople, stepped up to the challenge and did as it was told. TreasurySecretary Paulson (ex-Goldman Sachs) and his sidekick, Federal ReserveChairman Ben Bernanke, announced their bailout plan on Sunday to preventanother disastrous selloff on Monday when markets opened. Like thefirst-stage rescue of Wall Street's largest investment firms in March,this bold stroke was said to benefit all of us. The whole kingdom ofAmerican high finance would tumble down if government failed to act ormade the financial guys pay for their own reckless delusions. Instead,dump the losses on the people.
Democrats who imagine they may find some partisan advantage in theseevents are deeply mistaken. The Democratic party was co-author of thedisaster we are experiencing and its leaders fell in line swiftly. Housebanking chair, Rep. Barney Frank, announced he could have the bailoutbill on President Bush's desk next week. No need to confuse citizens bydwelling on the details. Save Wall Street first. Maybe lowbrow citizenswon't notice it's their money.
We are witnessing a momentous event--the great deflation of Wall Street--and it is far from over. The crash of IndyMac is just the beginning. More banks will fail, so will many moredebtors. The crisis has the potential to transform American politicsbecause, first it destroys a generation of ideological bromides aboutfree markets, and, second, because it makes visible the ugly powerrealities of our deformed democracy. Democrats and Republicans arebipartisan in this crisis because they have colluded all along over thirtyyears in creating the unregulated financial system and mammoth mega-banksthat produced the phony valuations and deceitful assurances. Thefederal government protects the most powerful interests from theconsequences of their plundering. It prescribes "market justice" foreveryone else.
Of course, the federal government has to step up to the crisis, but thecrucial question is how government can respond in the broad publicinterest. Bernanke knows the history of the last great deflation in the1930s--better known as the Great Depression--and so he is determinedto intervene swiftly, as the Federal Reserve failed to do in thatearlier crisis. By pumping generous loans and liquidity into the system,the Fed chairman hopes to calm the market fears and reverse the panic.So far, he has failed. I think he will continue to fail because he hasnot gone far enough.
If Washington wants real results, it has to abandon the wishful posturethat is simply helping the private firms get over their fright. Thegovernment must instead act decisively to take charge in more convincingways. That means acknowledging to the general public the depth of thenational crisis and the need for more dramatic interventions.
Instead of propping up Fannie Mae or others, the threatened firm shouldbe formally nationalized as a nonprofit federal agency performingvaluable services for the housing market. That is the real consequenceanyway if the taxpayers have to buy up $300 billion in stock.
The private shareholders "are walking dead men, muerto," InstitutionalRisk Analytics, a private banking monitor, observed. Make them eat theirlosses, the sooner the better. The real national concern should befocused on the major creditors who lend to Fannie Mae and other USagencies as well as private financial firms. They include China, Japanand other foreign central banks. Foreign investors hold about 21 percentof the long-term debt paper issued by US government agencies--$376 billion in China, $229billion in Japan.
It is not in our national interest to burn these nations with heavylosses. On the contrary, we need to sustain their good regard becausethey can help us recover by bailing out the US economy with more lending. Ifthese foreign creditors turn away and stop their lending now, the USeconomy is toast and won't soon recover.
Americans should forget about whining; it's too late for that. Peopleneed to get angry--really, really angry--and take it out on bothparties. What the country needs right now is a few more politicians inWashington with the guts to stand up and tell us the hard truth aboutout situation. It will be painful to hear. They will be denounced as"whiners." But truth might be our only way out.