Wall Street took the US (and the world) hostage and
extracted a heavy ransom. But while the enormous ransom was successfully
extracted, there are no guarantees that the hostages will be set free from the
shackles of trickle-down economics. On the contrary, there are strong
indications that the fraudulent (and perhaps criminal) bailout may turn the
current crisis into a protracted agony of a long bleeding economic depression.
Why the bailout scam is more likely to fail than to
Leaving the issue of fraud aside, the bailout scam is also
doomed to fail because it avoids diagnosis and dodges the heart of the problem:
the inability of more than 5 million homeowners to pay their fraudulently
ballooned mortgage obligations.
Instead of trying to salvage the threatened real assets or
homes and save their owners from becoming homeless, the bailout scheme is
trying to salvage the phony or fictitious assets of the Wall Street gamblers
and reward their sins by sending taxpayers� good money after gamblers� bad
money. It focuses on the wrong end of the problem.
The apparent rationale for the bailout plan is that while
the injection of taxpayers� money into the Wall Street casino may not be fair,
it is a necessary evil that will free the �troubled assets� and create
liquidity in the financial markets, thereby triggering a much-needed wave of
lending, borrowing and expansion.
There are at least five
major problems with this argument.
major problem is that the current financial disaster is not really a liquidity
problem as it is repeatedly portrayed to be. It is a problem of faith and
trust, or lack thereof, which in turn stems from the disproportionately large
amount of junk assets or mortgages relative to real assets. It is true that
lending and credit expansion has almost come to a halt and, in this sense,
there is a serious liquidity crisis. But this illiquidity is not really due to
a lack of good money or real assets in the system. It is rather because owners
of such valuable assets are unwilling to lend their precious possessions to
owners of troubled assets, or worthless papers.
As Herman E.
of Maryland economist,
puts it, �The value of present real wealth is no longer sufficient to serve as
a lien to guarantee the exploding debt. Consequently, the debt is being
devalued in terms of existing wealth. No one any longer is eager to trade real
present wealth for debt even at high interest rates. This is because the debt
is worth much less, not because there is not enough money or credit.�
major problem with the bailout scheme is that it is simply unfeasible and
ineffectual because there is just not enough good money to redeem all the bad
money that has ballooned or bubbled to a multiple of the good money and/or real
The initial $700 billion bailout money falls way short of
what is needed to rescue the Wall Street gamblers, as it is only a fraction of
their accumulated bad debt. According to a September 29 Washington Post report,
�Twenty of the nation�s largest financial institutions owned a combined total
of $2.3 trillion in mortgages as of June 30. They owned another $1.2 trillion
of mortgage-backed securities. And they reported selling another $1.2 trillion
in mortgage-related investments on which they retained hundreds of billions of
dollars in potential liability, according to filings the firms made with
regulatory agencies. The numbers do not include investments derived from
mortgages in more complicated ways, such as collateralized debt obligations.�
These three categories of mortgage-related financial
instruments add up to a $4.7 trillion obligation for the 20 largest financial
institutions. This is nearly seven times as large as the initial
Paulson/Bernanke bailout plan of $700 billion, which means the plan is destined
to be ineffectual.
Nationwide, the ratio of bad to good money is much higher.
According to Herman E.
Daly, �Financial assets have grown by a large multiple of the real economy
-- paper exchanging for paper is now 20 times greater than exchanges of paper
for real commodities.� This means that the initial $700 billion bailout fund is
simply a drop in the sea of bad debt, and that, therefore, there is not enough
good money to pay for the mountain of junk assets accumulated by the gambling
major flaw of the bailout plan is that, as mentioned earlier, it does not
address the real problem: the problem of rescuing the financially distressed
homeowners. As Paul
Craig Roberts points out, �the Paulson bailout does not address the core
problem. It only addresses the problem for the financial institutions that hold
the troubled assets. Under the bailout plan, the troubled assets move from the
banks� books to the Treasury�s. But the underlying problem -- the continuing
diminishment of mortgage and home values -- remains and continues to worsen.�
Simply moving soured assets from fraudulent lenders to the
Treasury, that is, buying junk mortgages at face value, will neither help the
millions of homeowners facing homelessness, nor help mitigate the raging
financial crisis. The bailout should, instead, focus on defrauded homeowners
and real assets, not fictitious capital and its unscrupulous owners.
Instead of trying to salvage a mountain of soured assets and
prop up bankrupt institutions, the government should allow for a market
cleansing, or destruction, of such worthless assets by purchasing the
threatened mortgages not at their inflated face value but at the current,
depreciated, or market value -- as the FDR government did in response the Great
Depression of the 1930s.
This alternative, homeowner-based solution would have a
number of advantages. First, and foremost, it would help citizens facing the
specter of homelessness stay in their homes by allowing them to pay affordable
mortgage installments based on reduced or realistic home prices.
By the same token, this solution would also allow the
government to gradually recover the market-based home prices it would be paying
the troubled commercial mortgage holders. Obviously, this means that, instead
of the predatory banks and similar financial institutions, the government would
now be the titleholder of the rescued homes; of course, until such homes are
paid for, upon which time the homeowners would take the possession of their
By cleansing the market of the dead weight of tons of junk
assets, and allowing threatened homeowners to pay affordable mortgage
installments, this bottom-up solution would also help restore faith and trust
in the financial system, and in the lending and borrowing mechanism -- thereby
also mitigating the liquidity crisis.
Furthermore, by bailing out homeowners (and real assets)
instead of Wall Street gamblers, the government would need only a fraction of
the money needed to pay for the huge bubble of the junk assets that have
ballooned on top of a much narrower base of real assets. Compared with the
scandalous Paulson/Bernanke bailout scheme, this means that the government
would end up with enough excess money to invest on a long-term, robust stimulus
plan a la the New Deal of the 1930s.
And this brings us to the discussion of the fourth major problem of the
Paulson/Bernanke bailout scam: lack of any economic stimulus plan, which is
badly needed for economic revival. While government substitution for predatory
lenders and the resulting institution of realistic or devalued mortgage
installments will certainly lighten the financial burdens of the economically pressed,
it will not relieve them from the need to earn an income and make a decent
living. Nor would it (by itself) provide the badly needed purchasing power or
necessary demand to stimulate the economy.
To achieve such broader socio-economic objectives requires
no less than duplicating (and perhaps even going beyond) FDR�s New Deal reform
package that proved critical in ending the Great Depression of the 1930s. A
comprehensive long-term public investment in both social and physical
infrastructure (health, education, roads, bridges, levees, schools, green
energy, etc.) is bound to create jobs, inject purchasing power and liquidity
into the economy, and revive production and expansion.
Of course, such an urgently needed comprehensive investment
in the future of our society requires extensive public financing, which, in
turn, requires a careful and socially responsible fiscal policy. And this
brings us to the fifth major
problem of the Paulson/Bernanke bail out scheme: absence of any mention, let
alone change, of our warped or lop-sided fiscal policies and priorities.
The sad and sick status of our public finance (the rising
budget deficits, the soaring national debt, the curtailment of crucially
important social spending, and the resulting neglect of both social and
physical infrastructure) is a direct consequence of our warped fiscal policies
that give priority to the interests of the super rich at the expense of
everybody else. It is a direct result of the looting of our public money
through a combination of (a) huge �supply-side� tax cuts for the wealthy and
(b) drastic increases in the share of military spending at the expense of
non-military public spending.
In a real sense, even the current financial meltdown is a
logical outcome of an economic philosophy that promotes extreme social
inequality. Contrary to �expert� punditry and popular perceptions, it is not
simply due to personal greed; more importantly, it is the result of a systemic
failure, or the outcome of the diverging and conflicting class interests.
Progressive taxation, social spending, New Deal reforms, and
the War on Poverty were designed not only to protect the poor and working
people against the woes and vagaries of market mechanism, but also to save
capitalism from itself. Instead of viewing public spending on social safety net
programs as long-term investments in the future of the nation, trickle-down
economic philosophy views such expenditures as overhead that needs to be cut as
much as possible.
To this effect, proponents of this philosophy have since the
early 1980s been working very hard to cut taxes for the wealthy, to cut
non-military public spending, and to reverse most of the social safety net
programs that were put in place by FDR�s New Deal and LBJ�s War on Poverty.
Not surprisingly, the result has been an extreme
concentration of national riches and resources in fewer and fewer hands,
side-by-side with a steady deterioration of the living standards of the
overwhelming majority of our citizens. Unable to make ends meet, most of our
citizens exceedingly resorted to borrowing.
Predatory lenders proved to be both creative and merciless
in taking advantage of the economically vulnerable, or the legitimate
aspirations and dreams of homeownership. Unfettered by the irresponsible
government deregulation policies, these rapacious lenders pushed loans, engaged
in deceitful or fraudulent lending practices, and unscrupulously invented many
shady financial instruments that resulted in the accumulation of massive
amounts of fictitious assets that proved unviable, and eventually collapsed
under their own dead weight.
Unless the lopsided national priorities and perverse fiscal
policies, known as trickle-down or neoliberal economics, which began under
Ronald Reagan, are somewhat rectified or mitigated, and the resulting financial
resources are invested through a broad and carefully-crafted plan of social and
economic recovery, no bailout plan of the plutocrats, by the plutocrats, for
the plutocrats can succeed in reversing the current cycle of economic decline.
author of the recently published The
Political Economy of U.S. Militarism (Palgrave-Macmillan 2007),
teaches economics at Drake University, Des Moines, Iowa.