How’s that Wall Street bailout working out for you?
Even after Wall Street panicked Congress into approving up to $700 billion to buy “toxic” mortgage-backed securities, the stock market continued to plunge and credit markets tightened. But a week after Treasury Secretary Henry Paulson reportedly told President Bush “There is no Plan B,” it turns out there is one: The Federal Reserve, on its own authority, plans to buy unsecured short-term debt (“commercial paper”) to corporations needing credit to maintain operations.
“This will keep the credit markets working even if the zombie banks aren’t up to the task,” Dean Baker of the Center for Economic and Policy Research wrote at Prospect.org (Oct. 7). “In other words, the threat of a complete meltdown in the absence of a bailout was nonsense and the media once again got taken for a ride by the Bush administration.”
Baker, like many progressive economists, favored a direct injection of capital into the banking system instead of overpaying for bad assets, as Paulson proposed.
Meanwhile, British Prime Minister Gordon Brown ordered a cash injection of up to $80 billion to recapitalize British banks to encourage them to start lending them. But unlike his American counterpart, Brown is expected to insist that British taxpayers receive generous dividends and profits on the deal if share prices recover.
Paul Krugman of the New York Times predicted a similar partial nationalization of US banks after the election. He doubts it can wait until the inauguration.
The people scored a victory Sept. 29 when the House rejected Rep. Barnie Frank’s rewrite of Paulson’s bailout bill 228-205. House Speaker Nancy Pelosi brought the bill to the floor with the assurance that Republicans would provide 100 votes to pass it, as the Dems were split 140-95. Minority Leader John Boehner (R-Ohio) didn’t come close as the GOP caucus voted the bill down 65-133. It was later reported that the Republican National Committee had ads on standby in swing states to place the blame for the bailout on the Democratic Congress.
The 777-point plunge of stock values that Monday shocked Congress members as well as mutual fund and 401(k) holders, who were heard from in the next few days, along with reinforcements from the banking and business lobby. Rep. Brad Sherman (D-Calif.) said the powerful forces who wanted the bailout created and sustained a panic atmosphere and even warned some Congress members “there would be martial law in America if we voted no.”
The Senate tossed in some business tax credits, increased the FDIC guarantee to appeal to small businesses and small banks and extended the Alternative Minimum Tax exemption to clear middle-income families this year. On Oct. 1 the Senate approved the bailout 74-25. The fight put progressive populists, such as Sen. Bernie Sanders (I-Vt.), Byron Dorgan (D-N.D.), Sen. Russ Feingold (D-Wis.) and seven other Dems on the same side as arch-conservatives such as Sen. Jim DeMint (R-S.C.) and Sen. Richard Shelby (R-Ala.), among the 25 senators who voted against the plan.
Sanders got little support for his proposal to pay for the bailout with a 10% surtax on any individual earning $500,000 a year or more or any family earning $1 million. It would have raised $300 billion in the next five years, but it failed on a voice vote.
Sanders acknowledged that the bill the Senate passed was better than the House version, but it still does not effectively address what taxpayers will actually own after they invest hundreds of billions of dollars in toxic assets. The bill also does not accomplish real oversight, since the Bush administration will name the oversight board members. It doesn’t provide relief from foreclosures, which is impacting millions of low- and moderate-income Americans. And it does not really limit executive compensation and golden parachutes. “Under this bill, the CEOs and the Wall Street insiders will still, with a little imagination, continue to make out like bandits,” Sanders said.
Most importantly, the bill does not deal with how we got into this crisis in the first place and it does not undo the deregulatory fervor that created trillions of dollars in complicated and unregulated financial instruments, such as credit default swaps and hedge funds. Those big issues were left for another day, presumably for the next Congress.
On the return trip, the House on Oct. 3 approved the Senate version, 263-171. Barack Obama deserves much of the credit—or blame—for passing the bill, as he lobbied House Democrats. One of the 33 Dems who switched from nay to yea was newly elected progressive Rep. Donna Edwards (D-Md.), who said she voted for the bill to protect jobs, retirement savings, home owners and small businesses. (25 Republicans also switched to “yea.”) Edwards said that Obama committed to work to provide direct relief to homeowners facing foreclosure by enabling home mortgages to be dealt with in bankruptcy proceedings. “I understand that this is the beginning of our work to stabilize our economy and prepare for our future-creating jobs, rebuilding our infrastructure and setting important priorities for health care, energy independence, and prosperity for working families,” she said.
But Rep. Dennis Kucinich (D-Ohio) called it “democracy’s Black Friday.” He told Chris Hedges, writing for Truthdig.com, “We buried the New Deal. Instead of Democrats going back to classic New Deal economics where we prime the pump of the economy and start money circulating among the population through saving homes, creating jobs and building a new infrastructure, our leaders chose to accelerate the wealth of the nation upwards.”
A poll by Rasmussen Reports on Oct. 4 found that 59% of voters would like to throw out the entire Congress and start over. That may be tempting, but Joseph Stiglitz, a Nobel Prize-winning economist who is one of Obama’s economic advisers, said on Democracy Now! Oct. 2 the bill was flawed but Congress had little choice but to pass it and revisit it after the elections.
In the November Vanity Fair, Stiglitz wrote that lowering interest rates will not stimulate the economy much, because banks are not going to be willing to lend to strapped consumers, and consumers are not going to be willing to borrow as they see housing prices continue to fall. But there are a few easy things to do. On energy, conservation and research into new technologies will make us less dependent on foreign oil, reduce our trade imbalance and help the environment. Expanding drilling not only will have a negligible effect on the price we pay for oil, but a policy of “drain America first” will make us more dependent on foreigners in the future.
He proposed a special expedited bankruptcy procedure, akin to what we do for corporations in Chapter 11, to allow people to keep their homes and restructure their finances. “Throwing the poor out of their homes because they can’t pay their mortgages is not only tragic—it is pointless,” he wrote.
This is not the time to turn to the old-time fiscal religion, he added. “Confidence in the economy won’t be restored as long as growth is low, and growth will be low if investment is anemic, consumption weak, and public spending on the wane. Under these circumstances, to mindlessly cut taxes or reduce government expenditures would be folly.”
Robert Borosage, co-director of Campaign for America’s Future, said progressives have their work cut out for them. “Wall Street got the bill it wanted,” he said. “But at the start of the 111th Congress in January, we will be ready. We promise a major mobilization to get the administration and Congress to kick start the economy with a bold investment agenda, to protect taxpayers with equity positions in the banks that they bail out, and go forward with comprehensive regulation of the financial system. Legislators who listened to their contributors on the Wall Street bailout are about to get an earful from their constituents on getting this economy moving from the bottom up.”
A grassroots movement is needed to keep Congress and the next administration honest. The election is only the beginning. Let’s make sure the next bailout is for working people. — JMC
From The Progressive Populist, November 1, 2008
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