Its easy to say that taxpayers should not bail out the robber barons who made obscene profits on Wall Street over the past decade. But its hard to listen to lectures on fiscal responsibility from John McCain and other conservatives who got us into this economic mess with their blind faith in right-wing free-market ideology.
McCain and his friends pushed through deregulation of financial systems in the last two years of the Clinton administration, but it took George W. Bushs maladministration to really mess things up. Under Bush, the cops were taken off the beat at the Securities and Exchange Commission and the Justice Department while the free market let bankers sell subprime mortgages to marginal, if not hapless, homebuyers. Then the bankers made off with uncounted billions of dollars in profits while they stuck other bankers, financiers, insurance companies and pension funds with uncounted trillions in shaky securities.
Now Wall Street is supposedly busted. The Bush administration was so alarmed by a potential credit freeze that it moved to nationalize not only Fannie Mae and Freddie Mac, the two largest secondary mortgage buyers, but also AIG, one of the largest insurance companies in the world. Next, the Bush administration proposed to pay $700 billion from the US Treasury to the private sector to start cleaning up the mess that the financiers have made. Nobody knows how much the cleanup would really cost. And Treasury Secretary Hank Paulson wanted no oversight and approval by the end of the week.
But there are reasons to be skeptical of the alarms. Democratic Congressional leaders rightly pushed for limits on executive compensation and demanded that the government get equity in return for every dollar it spends buying toxic assets from ailing financial institutions. They also want to help struggling homebuyers restructure their mortgages to stay in their homes.
The banking and securities industry oppose all three points, and so, apparently, does Paulson. On the requirement that firms participating in the bailout grant the government warrants to purchase stock, the Washington Post reported Sept. 23 that, according to sources familiar with the Treasurys thinking, such warrants would limit participation in the program. Only failing banks would be willing to give the government stock in exchange for buying up their bad assets, these sources said, according to the Post.
We thought failing banks were the ones we were trying to help.
Bloomberg News reported Sept. 22 that securities firms Goldman Sachs (Paulsons former employer) and Morgan Stanley, who are relatively healthy, may be the biggest beneficiaries of the bailout. And it turns out that the Bush administration has been drawing up this bailout plan for months before it was dropped on Congress, even as Paulson was assuring Congress that all was well.
David Cay Johnston, the former New York Times reporter who won a Pulitzer Prize reporting on tax policy, posting at the Romenesko News blog at Poynter.org (Sept. 23) asked fellow journalists to check out if the credit markets really are about to seize up. If they are, then lots of business owners should be eager to tell how their bank is calling their 90-day revolving loans, rejecting new loans and demanding more cash on deposit. I called businessmen I know yesterday and not one of them reported such problems. Indeed, Citibank offered yesterday to lend me tens of thousands of dollars on my signature at 2.99%, well below the nearly 5% inflation rate. That offer came after I said no last week to a 4.99% loan.
(Our inbox has letters offering 3.99% loans from Advanta Bank Corp. and Bank of America, so banks cant be too choosey.)
If Democrats decide that the bailout of Wall Street is needed, they had better get the best deal they can for Main Street because it looks like the GOP plan is to get the Dems to bail out Wall Street and then run populist campaigns against them for doing so.
Patrick Ruffini, a right-wing strategist, wrote at TheNextRight.com (Sept. 21) that Republican incumbents in close races have the easiest vote of their lives coming up this week: No on the Bush-Pelosi Wall Street bailout. God Himself couldnt have given rank-and-file Republicans a better opportunity to create political space between themselves and the Administration. ... Let this be the political establishment (Bush Republicans in the White House + Democrats in Congress) saddling the taxpayers with hundreds of billions in debt (more than the Iraq War, conjured up in a single weekend, and enabled by Pelosi, btw), while principled Republicans say No and go to the country with a stinging indictment of the majority in Congress. ...
Republicans who voted for the Bush tax breaks for the rich in 2001 and 2002 as well as the open-ended War in Iraq, which plunged the federal budget deep into the red, have no standing to criticize a vote to rescue the economy, of course. But that wont stop Republican demagogues. That is why Democrats should insist that there will be no bailout deal before the election unless McCain and his friends go along.
Nor should Democrats acquiesce to the claim that the deficits run up under Bush bar the expansion of domestic discretionary programs, such as universal health care, next year.
Robert Greenstein, executive director of the Center on Budget and Policy Priorities (cbpp.org), noted at HuffingtonPost.com Sept. 16 that Bush took office in January 2001 with a budget surplus furnished by the outgoing Clinton administration. The Congressional Budget Office at that time predicted that the 2009 budget would show a $710 billion surplus. Instead, the government now expects a $546 billion deficit. Thats a swing of $1.3 trillion.
Even taking into account the 2001 recession and the 9/11 attacks, which slowed the economy, Greenstein noted that the federal budget would still be projecting a $465 billion surplus in 2009 if Congress and the White House had not cut taxes while they increased spending. And its not domestic discretionary programs, such as education, medical and scientific research and law enforcement, that are to blame. They account for only 6% of the deterioration. Tax cuts account for 42% of the swing to red while increases in military and security programs account for 39%. The tax cuts will cost $295 million in 2009 alone.
While nearly all taxpayers got some tax cut, the distribution of benefits was skewed towards the wealthier classes. A typical household in the $40,000 to $50,000 income range gets a tax cut of about $950, while households with incomes over $1 million get tax cuts averaging $135,000.
Greenstein also noted that in 2001, CBO predicted the federal government would amass surpluses totaling $5.6 trillion over the 2002-2011 period. Now, CBO data show a cumulative deficit of $3.8 trillion over that same period. Thats a $9.4 trillion deterioration, $7.2 trillion of which was caused by policy actions. Tax cuts and security-related spending increases caused 83% of that.
Domestic discretionary programs shouldnt be made the scapegoat for the emergence of large deficits, he concluded.
Congress can minimize the exposure of middle-class taxpayers to a bailout by adopting the proposal of Sen. Bernie Sanders (I-Vt.) of a five-year, 10% surtax on income of individuals above $500,000 a year, or $1 million a year for couples. That would raise more than $300 billion in revenue.
Also, Congress should levy a transactions tax of 0.02% on the purchase or sale of a futures contract or a tax of 0.025% on the purchase or sale of a share of stock, as Dean Baker proposes. Such a tax could raise more than $100 billion a year.
With these taxes, Wall Street and the wealthy who have benefited from the past decade of excesses not only would pay for any bailout, but also would let the government proceed with an economic recovery program that puts Americans back to work at decent wages, rebuilding our crumbling infrastructure and developing sustainable energy resources that relieve our dependence on foreign oil. Maybe even expand health care. JMC
From The Progressive Populist, October 15, 2008
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