"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
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|
|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|
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.
Compared to What?
If we were in Vienna, we would say, "We wish we could play this on the piano!"
By comparison, Detroit's latest request for a mere $25 billion bailout looks positively miserly. Can't Motor City take a page from New York, and figure out how to scare the nation into truly gargantuan largesse?
Compared to other bailouts, this is clearly by far the largest ever. For example, the total amount of debt relief provided to all Third World countries by the World Bank/IMF, export credit agencies, and foreign governments from 1970 to 2006 totaled just $334 billion ($2008), just 8 percent of all the loans. Jeff Sachs and Bono and Geldof, where is thy sting?
Back at home, the entire savings and loan bailout in the late 1980s cost just $170 billion ($2008). And the FDIC's 1984 bailout of Continental Illinois, the largest bank failure up to this year, started out as (in $2008) a paltry $8 billion, and eventually (when the books were closed in the 1990s) wound up a mere $1.6 billion as various asset recoveries dwindled in.
On the other hand, compared with countries like Norway, UAE, Singapore and South Korea that are well on their way to building forward-looking "sovereign wealth funds" to make strategic investments all over the world, the United States seems to be on a drive to create a "sovereign economic toxic waste dump."
No one has any very precise idea of just how much this bailout would actually cost, even if the $700 maximum ("at any point in time"!) were approved. This is not only because many of the securities are complex and thinly traded but also because their value is hostage to the future of the US housing market, which is still in free fall. Housing prices have already fallen by 20-32 percent in the top twenty markets since mid-2006, but as of June they were continuing to fall in eleven out of twenty major markets, especially Florida, Southern California and Arizona, where the roller coaster has been the most steep. While there analysts believe they can see weak signs of a recover, most are betting things will continue to slide well into next year.
We do know that at current T-bond rates (2-4 percent for two-to-ten-year bonds, the most likely maturities), the immediate cash cost of this bailout would be an extra $40 to $60 billion a year in interest payments alone.
Since the borrowed funds will be invested in high-risk assets, however, the most important potential costs involve capital risk. There's a good chance that, as in the case of Bear Stearns, we'll ultimately get much less than $0 .50 for each $1 borrowed by the public and invested in these assets. For example, Fannie and Freddie alone could easily be sitting on $500 billion of mortgage securities losses (=$2 trillion/$5.3 trillion times 50 percent default, times 50 percent asset recovery).
All told, on top of the interest cost, this could easily make the cost of this bailout to taxpayers at least $150 billion a year for a very long time.
No wonder traders on the floor of the New York Stock Exchange reportedly broke out singing "The Internationale" when they heard about the bailout.
But these direct financial costs of the bailout are only the beginning...
Hijacking the Future
Last week's events produced terabytes of erudite discussion and wall-to-wall TV analysis by Wall Street journalists, prophets and pundits about short-selling rules, CDOs (collateralized debt obligations), "covered bonds," MBSs (mortgage-backed securities) and the future structure of the financial services. This is par for the course as far as financial journalism is concerned--the "debt crisis story," whether at home or abroad, is almost always told mainly from the standpoint of what's in it for the industry, the banks, the regulators and investors. And once they are secure, the story disappears.
For the 90 percent of Americans who have never heard of a "CDO," own no money-market funds and own less than 15 percent of all stocks and bonds, however, this bailout means just one thing. All of the money has just been spent. And it has not been spent on you.
For example, unless the public quickly rises up and demands an increase in taxes on the rich, big banks and big corporations, as well as some public equity in exchange for the use of all this money, the costs of this bailout could easily "crowd out" almost all of the $140-to-$160 billion of new federal programs that Barack Obama has proposed.
|Obama's Agenda - Cost Per Year|
|New Health Plan||$50-$65||continuous|
|Health Info Reform||10||10|
|New Energy Tech||15||10|
|No taxes for seniors||7||continuous|
|Mortgage tax credit||5||continuous|
|Earned income incentives||5||continuous|
|Foreclosure aid||10||one time|
|Aid to displaced Iraqis||2||?|
|Summer ed for kids||0.5||continuous|
|National infrastructure fund||6||10|
|50% child care credit||??||continuous|
|Other education aid||18||continuous|
|Increased Army, Marines||??||continuous|
|First $4k - tuition credit||??||continuous|
It will certainly make it impossible for Obama to finance his programs without either borrowing even more heavily, or going well beyond the (modest) tax increases (on oil companies and the upper middle classes) that he has proposed. Without such changes, there may be little federal money available for comprehensive health insurance or the reform of the healthcare delivery system.
There will be little additional funding for pre-school education, child care or college tuition.
There will be little additional funding for investments in energy conservation, wind or solar power.
There will no money for additional investments in national infrastructure (e.g., the reconstruction of our aging roads, highways and bridges to "somewhere.") Highway privatization and toll roads, here we come.
There will be no money to bail out the millions of Americans who have already lost their homes, or on are on the brink of losing them. The supply of housing loans and other credit will remain tight, despite the bailout. Indeed, if the economic elite has its way, the long-sought dream of "a home for every middle-class American family" may well soon be quietly abandoned as a goal of government policy. Apparently, that was the reason for all those fraudulent lending practices!
Meanwhile, the government-sponsored consolidation of the financial services industry--another side effect of the bailout--is likely to make any remaining banks, insurance companies and brokerage houses more profitable than ever. (That's why, for example, you saw Chubb's stock price soaring last week even as AIG was going under.) This is no doubt good news for the "owners of the means of finance." For the rest of us, however, it will just mean steeper fees and rates, and scarcer credit. And if we fail to keep up with any new charges, we'll face the new rough justice delivered courtesy of our latest Wall Street-backed bankruptcy "reform," which was rammed through the Congress in 2005 with support from most Republicans and many top Democrats.
There will also be no money to shore up the long-run drain on Social Security or Medicare. Indeed, ironically enough, this latest bank bailout may even increase the financial pressure to privatize these comparatively successful government programs.
There will be no extra money to house our thousands of new homeless people, relieve poverty, rebuild New Orleans or support immigration reform.
There will be no additional funds for national parks. There will, however, be more homeless people dwelling--or getting evicted--from the more and more toll-intensive parks that exist.
Indeed, we might as well get used to the idea of privatizing our best national and state parks and turning them into theme parks. We can also drill for oil and gas in the Arctic National Wildlife Refuge, Yosemite, the Grand Canyon and right off the Santa Barbara coast. Perhaps the oil barons will give us an advance on all those "Drill, baby!" oil royalties.
There will be no funds available for increased homeland security. This is likely to depend increasingly on the Sarah Palin model--a .38 in the glove compartment and a Winchester under the bed.
There will certainly be no "middle-class" tax cut. Absent a progressive tax reform, the only "cut" the middle class is going to receive is yet another sharp reduction in living standards.
All told, this Bush/Paulson "permissive banking/massive bailout" model may beat even the old 1980s vintage Reagan formula, which tried to force government downsizing with huge tax cuts.
Contrary to the sales pitch for that formula, of course, the tax cuts never quite produced any supply-side miracles or incremental tax revenues, let alone any significant government downsizing. As we saw under Bush after his huge tax cuts in 2001 and 2003, it simply proved too easy for the federal government to borrow. And no matter how "conservative" one is in general, it seems one can always find wars, farm subsidies, defense contractors and "bridges to nowhere" to spend gobs of money on, just as recklessly as any "liberal."
Lately, however, it appears that US debt levels may indeed be reaching the point where they might well impose a limit on increased spending--if for no other reason than foreigners, who now own about 40 percent of our publicly held federal debt, are beginning to wonder whether or not the United States isn't going to be the latest "submerging market."
Given the sheer size of Paulson's proposed additonal debt foreign creditors, I suspect that the Treasury's real borrowing costs may actually start to rise. And outside the financial services industry, some parts of Main Street are already concerned about being "crowded out" by record government borrowing.
The Alternative--A 'Get Real' New Deal
To make sure that real economic reform is still affordable, we need to demand a "Get Real/ New Deal" from Congress--right now. At a minimum, this Get Real/New Deal package should include measures like:
(1) the restoration of stiff progressive income and estate taxes on the top 1 percent of the population (with net incomes over $500,000 a year and estates over $5 million)--especially on excessive CEO and hedge fund manager compensation;
(2) much more aggressive enforcement and tougher penalties against big-ticket corporate and individual tax dodgers;
(3) tougher regulation of financial institutions--possibly by a new agency that, unlike the US Federal Reserve, the SEC and the US Treasury, is not "captive" to the industry;
(4) a crackdown on the offshore havens that have been used by leading banks, corporations, and hedge funds to circumvent our securities and tax laws;
(5) The immediate revision of the punitive bankruptcy law that Congress enacted in 2005 at the behest of this now-bankrupt elite;
(6) while we are at it, stiff "pro-green" luxury taxes on mega-mansions, private jets, Land Rovers, yachts and all other energy-inefficient upscale toys; and
(7) a national commission to investigate the root causes of this financial crisis from top to bottom, and actually (unlike the hapless, ineffectual 9/11 Commission) hold people accountable.
Finaily, if the public is really going to be asked to postpone (at least part of) the reforms it has been seeking, and provide so much of the risk capital for this restructuring, we should also demand:
(8) a decent amount of public equity in the private financial institutions that will be receiving so much of our help. This will permit taxpayers to share in the upside of this restructuring, rather than just share the downside risks.
Along the way, of course, we may also have to explain to Secretary Paulson that this country is still a democracy, not a Goldman Sachs- =style hierarchical mens' club (with great respect to Goldman's fifty-four female partners out of 383)--even after eight years of President Bush. He is not simply going to be given (contrary to his request) completely unfettered discretion to hand out vast "liquidity injections" to his buddies on the street--no matter how worthy and important..
Over time, this progressive Real/New Deal could help raise the hundreds of billions in new tax revenue that will be needed to offset the costs of this bailout. If the bailout works, the taxpayers as a whole will at least be able to receive some capital gains and perhaps some bank dividends for their trouble. Who knows, they may also even begin to feel a greater sense of solidarity with their bankers!
Such a participation will be essential if the federal government is to be able to afford key reforms like health insurance, clean energy and investments in education.
These may not matter quite so much to some Wall Street executives, financial analysts, Treasury or Federal Reserve executives or even the more than 120-130 members of Congress and forty to forty-five US Senators who happen to earn more than $1 million a year--and are already covered by a generous "national health care" package of their own design. But these are the key "systemic risks" that ordinary Americans face.
These reforms may sound ambitious. So is the bailout. And the reforms that we are discussing are only fair.
After all, we the American people have recently been the very model of forgiveness and understanding. We have tolerated and footed the bill for stolen elections; highly preventable terrorist attacks; gross mismanagement of "natural" disasters; prolonged, poorly conceived, costly wars; rampant high-level corruption; pervasive violations of the US Constitution; and the systematic looting of the Treasury by politically connected defense contractors, oil companies, oligopolistic cable TV and telecommunications firms, hedge fund operators, big-ticket tax evaders and our top classes in general.
Does "class" still matter in America? You betcha--perhaps more than ever. But enough is enough. Call your Congressperson now. Demand a"Get Real/ New Deal" qualifier to the bailout package before it is too late.
We deserve to get much more for our money. So do our kids.