The Geithner plan is out and has all the spin of "creative" new ways to manage private and public joint ventures. It is clearly the case that the distributional economics of it is lousy for the taxpayer. Granting subsidized loans backed by taxpayers to artificially inflate toxic asset prices to subsidize the Too Big Too Resolve Financial Institutions is what Rahm Emanuel might call "donor heaven." The alternative of restructuring banks and forcing the debt holders to convert their bonds, in part, to equity (rather than force the taxpayer into capitalize these firms) has been dismissed, and PIMCO is smiling. The stockholders and bondholders of large banks are protected. They talk systemic safety, but their eyes say profit, or avoided loss.
It remains to be seen whether this plan will generate the volume of buying that will be required to repair the system. Though the ultimate outcome of this bailout will be hundreds of billions more than it needs to be, as a result of the dominant power of financial institutions in American politics, we all must hope that the massive subsidies of them will be effective in unlocking credit flows and a revival of the macro economy. Even if we massively overpay because our "experts" think that all major donors are too frightening to resolve (TFTR), we should hope for positive results that put this tragic episode behind us.
So as citizens, we can now look forward to return to a life of being scolded by the pillars of finance for vilifying the people (the pillars themselves) who cost us a couple of trillion dollars, admit no wrongdoing, and escape any meaningful consequences. They can now return to chiding us about not joining the team in a crisis equivalent to Pearl Harbor that has the overtones of being anti-patriotic if you do not acquiesce to letting them feel good about getting subsidies from the taxpayers because they are, after all, "smart money." Maybe they are right. That appears to be the American way. (more…)
(Our series on bailout transparency continues with economist Rob Johnson, formerly a managing director at Soros Funds Management and chief economist of the Senate Banking Committee. Please welcome him in the comments — jh)
The myth of the free market as distinct from the government has just crashed and imploded. So has the myth of Horatio Alger that one can ward off fear by just putting your head down and keeping government out of your hair. Government has not, even now, erected adequate boundaries vis a vis taxpayer money for the financial sector and the excesses of the financial sector have exploded Horatio Alger. Alger has been blown off his moorings due to no fault of his own. Yes Horatio, you can be destroyed by the actions of others and it is the role of government to set up a context which maximizes your "freedom to" while giving you the most "freedom from" harm by others.
Wall Street has not just spilled all over onto our economic well being. The harm is enormous. The interest on the debt on 2.5 trillion of losses could pay for national health insurance forever!! Wall Street firms were the architects of the rules that fomented the explosion. A look at the role of money in politics, the actions of Congress and successive White House inhabitants, both Democrat and Republican, and the army of scholars who have confected visions of economy that resemble marketing programs for Wall Street rather than analysis of the financial economy suggests a conscious strategy to unshackle finance from the government, all the while maintaining the downside protection of the taxpayers.
So now the question has changed. It is not what happened. It is what, as citizens and activists, do we do about it?
Previous chats in the series: Economist James K. Galbraith, Rep. Alan Grayson, Yves Smith of Naked Capitalism, Pulitzer Prize winner David Cay Johnston.
And don’t forget to sign the petition: No More Dough Til We Know Where It Goes
The crisis on Wall Street appears to be very severe. The Federal Reserve’s emergency actions, background discussions with foreign central banks about outright purchase of mortgages, and the premiums on interbank interest rates over Treasury Bills (The so called Ted Spread) suggest that fear of credit collapse is significant. As a result "the rules of the game" are in play.
Naomi Klein, in her recent book, The Shock Doctrine, addresses the strategy of response to crisis. She cites Milton Friedman who once wrote:
only a crisis-actual or perceived-produces real change. When the
crisis occurs, the actions that are taken depend on the ideas lying
around. That is our basic function: to develop alternatives to
existing policies, to keep them alive, and available until the
politically impossible becomes the politically inevitable. (from Capitalism and Freedom)
I would argue that the Wall Street meltdown and its shocking consequences will create the crisis conditions that are ripe for change. Albeit, Dr. Friedman had the opportunity to enact change because he often promoted ideas particularly suited to the wealthy and the powerful. Yet it is those ideas, largely underpinning the policies of the last 40 years, that are now called into question. Therein lies the opportunity. (more…)