|Wall Street Held a Gun to Our Heads
The $700bn bail-out bill is a victory for wealthy bankers who
exploited fears of a financial crisis for their own gain
By Dean Baker
MOST AUTHORS OF books on politics or economics are happy when they get
one or two prominent members of Congress to endorse their work. It
looks like I'm about to get majorities of both chambers to endorse my
book, The Conservative Nanny State: How the Wealthy Use the Government
to Stay Rich and Get Richer (free download available). There is no
other way to describe Henry Paulson's $700bn bail-out deal.
The point of my book is that the battle between progressives and
conservatives is not about a policy of government intervention as
opposed to free market policies. Rather, it is a battle between those
who want to use the government to benefit the middle and bottom of the
income distribution and those who want to use the power of government
to redistribute income upward.
The bail-out is a big victory for those who want to redistribute
income upward. It takes money from school teachers and cab drivers and
gives it to incredibly rich Wall Street bankers. These bankers have in
turn distinguished themselves by their incompetence, having driven
their banks into the ground.
This upward redistribution was done under the cover of crisis, just
like the war in Iraq. But there is no serious crisis story. Yes the
economy is in a recession that is getting worse, but the bail-out will
not get us out of the recession, or even be much help in alleviating
The best argument that the bail-out proponents had was that the
failure to do the bail-out could lead to a collapse of the financial
system, leaving us unable to use credit cards or ATMs, or otherwise
conduct normal financial transactions. This would indeed be scary,
since it would imply a complete economic collapse. (I had actually
accepted this line.)
Actually this was entirely an idle threat. In the event the banking
system really did freeze up, then the Federal Reserve would step in
and take over the major banks. (It had contingency plans for such a
takeover in the 1980s, when the money centre banks were saddled with
billions of dollars of bad developing country debt.) [this is a
extremely important point. -- JD]
The banks would not be happy about a Fed takeover. The top executives
would be out of their jobs, and the shareholders would likely lose
their full investment. However, the rest of us would be able to carry
on with our lives as we did before. After maybe a few hours of
disruption, we would be able to cash checks and use credit cards and
ATMs just as we did before the crisis.
In effect, the big banks had a gun pointed at their heads. The banks
told Congress that if they didn't get $700bn, then they would pull the
trigger. Given this choice, Congress coughed up the cash.
While the final version is an improvement over the original request,
there is little by way of hard commitments on the key points. Which
executives will see their pay limited and by how much? How much equity
does the government get for buying the banks' bad debts? How many
mortgages will be renegotiated? If this were a serious bill, there
would be specific wording on these points.
Henry Paulson did not sign a contract when he was CEO with Goldman
Sachs that gave him "fair compensation". He signed a contract that
specified that he would get tens of millions of dollars in salary and
bonuses. Similarly, when Warren Buffet invested $5bn in Goldman, he
got a 10% stake in the bank, not a generic promise of "equity". That
is the way business is usually done when people are serious.
The bill also does not change the bankruptcy rules to allow people to
stay in their homes. Nor does it provide for any real stimulus.
Undoubtedly, the spending on the bail-out will be used in future
months as an argument against real stimulus.
Wall Street may have won this one, but this is the battle not the war.
The whole country now knows that these millionaire and billionaire
high-flyers are the biggest bunch of welfare cheats around. The folks
with the yachts, private jets and personal servants lack the skills
and diligence to make it on their own. They need the tax dollars from
the rest of us to make ends meet.
Every progressive in the country should be working to ensure that this
bail-out is incredibly costly for the Wall Street crew. They should
wish that they never took our money.
-- This article was published on September 29, 2008 by The Guardian Unlimited.