United States: Their desperate gamble
Comment & Analysis, Green Left Weekly issue #769 1 October 2008
Whether or not US Treasury secretary Henry Paulson’s rescue scheme works, one thing is already crystal clear: The capitalist system has failed spectacularly. The following editorial was published by the US Socialist Worker on September 25.
Henry Paulson is demanding the financial equivalent of martial law — US$700 billion and a blank cheque to rescue the Wall Street system from the catastrophe caused by the blind greed of the super-rich parasites who run it.
The Democrats who control Congress say they’ll grant Paulson’s demand for virtually unlimited powers to direct a financial rescue operation on a scale with the US government’s “war on terror” around the world. They’re satisfied with nothing but a promise of a little help — maybe later, possibly — for working people.
“We need to give the secretary the authority to work”, the Senate Banking Committee Chair Christopher Dodd, a Democrat, said on ABC’s This Week. “These are complex issues. I don’t think we ought to micromanage that part of it.”
As if questioning Paulson’s demand for personal control of $700 billion in defiance of the US Constitution is “micromanagement”!
Besides making a mockery of the US political system, Paulson’s super-bailout plan buries 30 years of what the New York Times referred to as “market dogma” — the ideology that capitalism works best for everyone when unfettered by regulation.
Just a few weeks ago, this was an unquestionable certainty of US politics, shared by both major parties, if given a more humane gloss by Democrats.
Now all that’s changed. A man-made earthquake has struck the world financial system, and the scope of government efforts to cope with it has buried the old Ronald Reagan slogan that “government isn’t the solution to the problem, government is the problem”.
“This past week marks a decisive turn in the evolution of American capitalism”, wrote David Wessel of the Wall Street Journal. “Black September, the biggest financial shock since the Great Depression, is prompting a Republican Treasury secretary and Federal Reserve chairman to devise the most muscular government intervention in the economy since the Great Depression in an effort to prevent the economic devastation of the Great Depression.”
Indeed, the meltdown on Wall Street is an indictment of the whole free-market system, whose drive to enrich a tiny minority produces chaos in the best of times, and untold misery and suffering in the worst. What Paulson wants to do is save this system at the expense of the rest of us — so the same priorities can be re-imposed.
A national health care program, patterned on Medicare? Too expensive. A spending plan to rebuild crumbling public schools? Unaffordable. A government program to rebuild collapsing infrastructure and put the unemployed to work? Naive nostalgia for the New Deal of the 1930s.
But now that the workings of the market caused some of Wall Street’s most revered names to disappear overnight and threatened the wealth of the super-rich, it’s time to give Paulson — himself a former Wall Street CEO — unlimited personal power to spend hundreds of billions of taxpayer money to buy up the bad debts tied to the housing crisis.
Ironically, it’s the nationalisations of financial institutions by the supposedly free-market Republican Bush administration that is reviving the specter of the 1930s New Deal of Democratic President Franklin Roosevelt, which massively expanded government programs and spending to try to lift the economy out of the Great Depression.
The Paulson proposal — US President George Bush, the “leader of the free world”, is, of course, irrelevant — to spend $700 billion on the financial crisis came just three days after the US laid out $85 billion to effectively nationalise AIG, the world’s biggest insurance agency. AIG was nearly sunk by its involvement in bad mortgage-backed securities, and its failure could have triggered collapses of financial institutions worldwide.
The AIG takeover followed a couple of weeks after the US put $200 billion on the line in the nationalisation of Fannie Mae and Freddie Mac, the government-sponsored enterprises that own or guarantee nearly half the nation’s mortgages. Six months earlier, it was seen as an unprecedented move when the Federal Reserve Bank put up $29 billion to finance the takeover of investment bank Bear Stearns by JPMorgan Chase.
Now Paulson wants total control of $700 billion of taxpayer money to buy up bad mortgage-backed securities from both US and foreign financial institutions. “Comrade Paulson seizes the economy’s commanding heights”, economist and New York Times columnist Paul Krugman wrote on his blog in an ironic reference to socialism.
But Paulson’s nationalisations and bailout plans are the polar opposite of socialism, an economic system in which a democratically planned economy is controlled by the workers who produce the wealth.
On the contrary, Paulson wants to dispense with even the veneer of democracy that exists under the Washington system — and concentrate in his own hands complete control over huge parts of the economy.
At this moment of acute crisis, the realities of the US political system are on display. The people who matter most aren’t voters and citizens, or even those elected to represent them in Congress or the White House. Instead, crucial government decisions are being personally carried out by a man worth $500 million, who will act in the interests of his class.
The housing boom helped put even greater amounts of wealth in the hands of a tiny minority; now, they want to foist the cost of the bust onto the public. And rather than create a new government agency that could be subject to congressional control and public review, Paulson’s plan calls for hiring private companies to purchase the bad debt — which means many millions of dollars in fees for whatever Wall Street companies get the Treasury Department’s business.
To make Paulson’s power grab more politically palatable there may be a few crumbs for workers. This could include laws making it easier to renegotiate mortgages at lower rates of interest, or perhaps a modest $50 billion economic stimulus package. But rather than insist that Paulson include aid for working people as part of his proposal, the Democrats are capitulating at the first opportunity, and promising only vaguely to do something in the future.
Thus, Democratic Senator Charles Schumer of New York, one of Wall Street’s main men in Washington, rolled over for Paulson’s proposal. “We will not Christmas-tree this bill” with measures to help working people, Schumer said on Fox News. “The times are too urgent.” He added that a stimulus package “doesn’t necessarily have to be part of the bailout.”
Paulson hopes to restore confidence to the world financial system, which has come close to paralysis in recent days as banks refuse to trade with one another. Every bank lies about the bad debts on their own balance sheets, and reasonably assumes the other party has done the same.
To counter this trend, the Fed made $180 billion available for loans to foreign central banks on September 18, which in turn made tens of billions more available for loans to private banks and financial institutions. But as a Morgan Stanley researcher noted, “the intervention does not directly address the key problem … banks’ desire to hoard cash and their reluctance to lend to each other”.
There’s no guarantee that Paulson’s long-term program will avert this immediate crisis. It’s telling that Paulson and Federal Reserve chair Ben Bernanke felt it necessary to grant government insurance beyond bank deposits to $3.4 trillion in money-market mutual funds for a year.
The Securities and Exchange Commission also stepped in with a 10-day ban on “short-selling” stock in 799 financial institutions — a tactic used by speculators to bet on a decline in stock prices. It was short-sellers who helped drive the investment bank Lehman Brothers into bankruptcy and force another, Merrill Lynch, to sell itself to Bank of America.
But the short-sellers were only responding to the reality of the situation — hundreds of billions of dollars in assets held by financial institutions worldwide that are worth only a fraction of their stated value.
Even if Congress gives Paulson everything he demands, huge questions remain. How much will the Treasury Department pay for the bad mortgage-backed securities? Earlier this year, Merrill Lynch sold off sub-prime mortgage-backed securities originally valued at $30.6 billion for just $6.7 billion — 22 cents on the dollar. Will Paulson use US taxpayer’s money to pay that amount — or twice that, or half? And what price will Paulson get when the Treasury, in turn, tries to sell that toxic debt to some hedge fund?
“If Wall Street gets away with this”, wrote William Greider in the Nation, “it will represent a historic swindle of the American public — all sugar for the villains, lasting pain and damage for the victims”.
In any case, the bad assets will have to be marked down, sooner or later, and banks will be forced to raise their capital reserves to compensate for the losses. That, in turn, will make them reluctant to lend, cutting off the lifeblood of an economy that is already mired in recession.
If Paulson’s plan succeeds, the economy could avoid the fire of a collapse of the financial system, but remain in the frying pan of a miserably slumping economy with rising jobless rates. (Then there are the possible side effects of Paulson’s program, including the devaluation of the dollar and rising inflation, as the Fed and Treasury Department pump hundreds of billions of dollars into the economy).
It’s impossible to foresee the next twists and turns in a crisis that was unimaginable just a short time ago. But one thing is already crystal clear: The capitalist system has failed spectacularly.
Corporate America and its hired intellectual hacks in academia and the media have preached for decades that there is no alternative to the market. If workers weren’t living well, it must be their own fault for failing to meet the challenges of a competitive, individually oriented society.
Now, the ruling class is attempting to use “big government” spending to bail out their own interests.
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