Bailing Out on Wall Street

They say that the financial system is on the brink of collapse, that it has stopped “working”. This sounds bad. However, before rushing to support whatever solution is put forward to fix it, it would be best to figure out what it was like when it was working smoothly. Only then can you know whether or not you want to fix it. Some of the votes of “no” to the bailout came from representatives that believed just that: that the goal is not to put everything back the way it was, with the same people in charge.[1] While it’s true that all Americans will suffer to some degree if nothing is done, there is no guarantee that “the plan” (with its very vague phrasing) will “work” (and here we can assume that the stated goal of “saving America” is likely not a primary goal). Remember, the proponents of this plan are the same jokers that (A) tanked the economy in the first place and (B) sold us other gems like the war in Iraq. Caveat emptor.

A tour of reasoned, considered opinion and unhinged ranting (all available online, for free!) shows a similar trepid attitude toward the whole affair. The suspicion of the bail-out as proposed was well-founded: it was written by scoundrels and benefitted scoundrels, who’d gamed the system in order to be able to blackmail America into saving them. America called its bluff and told it to rot in hell, though it may have signed its own death warrant as well. What the hell, if you’ve watched any American cinema at all, that type of attitude is as American as apple pie.

The article A Better Bailout by Joseph Stiglitz (The Nation)—written by no less an eminence than a former World Bank president and Nobel Prize winner in economics—is highly critical of the assets addressed by the bailout, noting that “[n]o private firm was willing to buy these toxic mortgages at what the seller thought was a reasonable price”; he is also highly suspicious of the cast of characters (gang?) running the show in Washington:

“To be frank, the administration has a credibility and trust gap as big as that of Wall Street. If the crisis was as severe as they claim, why didn’t they propose a more credible plan? With lack of oversight and transparency the cause of the current problem, how could they make a proposal so short in both? […] Why not spend as much on [Americans that are losing their homes] as on Wall Street? Do they still believe in trickle-down economics […]? ”

The article Congress Confronts Its Contradictions by George Monbiot offers the opinion that we should remove surprise and shock from our response to the effrontery of the administration. If you’ve been paying attention for the last n decades, then you should realize that “[t]he banking subsidies [in the bailout] are as American as apple pie and obesity.” In fact, the world economy would never have gotten where it was without private profit and public risk because “corporate welfare is a consistent feature of advanced capitalism.”

Then there’s the article, Rep. Dennis Kucinich Rejects $700 Billion Bailout (Democracy Now!). Kucinich is one of those that thinks the system is broken, but that we should replace it with something else, not just slap a band-aid on it and let it run aground again at a later date.

“I reject the underlying premise that we needed this bill. […] We haven’t looked at any alternatives, […] We have a bill here, a bill of more than a hundred pages, that we haven’t had a single hearing on the bill, you know—on the concept, yes, on what Paulson and Bernanke asked for initially. But, you know, we need to have hearings on this. There’s 400 economists and three Nobel Prize-winning economists who have said, “Whoa, wait a minute! What are you doing? Why are you rushing this?” You know, this thing doesn’t smell right, frankly.”

And these days, when something doesn’t smell right, it’s likely because of a politicization of yet another law-making process. Kucinich went on to note “that we’re putting this up before an adjournment in an election season shows that Congress is being put under extraordinary pressure to bail out Wall Street.” The hurry, hurry, hurry attitude is an old con-man’s trick to force a bad decision.

So, that’s Joe Stiglitz wondering aloud why Congress didn’t try harder to make a bailout that benefitted everyone and George Monbiot and Dennis Kucinich muttering that it’s because they thought they could get away with the same old game of graft they’ve been working for decades. That’s not bad, but what’s missing is a little more bombast[2], which the article, The Rich Are Staging a Coup Right Now by Michael Moore (AlterNet), fills in nicely.

“This bailout’s mission is to protect the obscene amount of wealth that has been accumulated in the last eight years. It’s to protect the top shareholders who own and control corporate America. It’s to make sure their yachts and mansions and “way of life” go uninterrupted while the rest of America suffers and struggles to pay the bills. Let the rich suffer for once. Let them pay for the bailout.”

Amazingly not too much different from Monbiot and Stiglitz, actually. It’s got a bit more of the “f&%k ‘em if we’re f%@ked anyway” edge to it, but Moore makes essentially the same point. It wouldn’t be fair to not cite someone for the defense, so next up is the article, How Much Will It Cost and Will It Come Soon Enough? by James K. Galbraith (American Prospect)[3], which explains the exact fiscal obligations one can expect from the bailout for the American taxpayer.

“Despite the common use of language, the capital cost of this bill does not involve “taxpayer dollars.” It authorizes a financial transaction, exchanging good debt (U.S. Treasury bills and bonds) for bad debt (the “troubled assets”). Many of those troubled assets will continue to earn income for some time, perhaps a long time. The U.S. Treasury commits itself to paying the interest on the debts it issues. The net fiscal cost – which is also the net fiscal stimulus – of this bill is the difference between those two revenue streams. Given the very low rate of interest presently prevailing on Treasury bills, this is likely to be somewhere between $20 billion per year and zero from the beginning, even if the Treasury were to issue all $700 billion in new debt at once. It is a mistake, in short, to count the capital cost as a “cost to the taxpayer.” This is not the war in Iraq. In the longer run, of course the Treasury will incur capital losses on the assets it acquires. The entire purpose of the bill is to overpay for bad assets, so as to give financial institutions a chance to recapitalize themselves. (emphasis added)”

Oh-kay.

This is a very good and accurate description of the bailout[4], as it gets to the crux of why it could ever possibly “fix” anything. The emphasized portions tell the story: we (the government) buy “bad debt” (of completely unknown quality) with “good debt” (very stable T-Bills and so on), hoping that the bad debt will turn out to “earn income for some time”. We are, in effect, “overpaying […] for bad assets”. The obvious question to ask is: if the bad debt is expected to mostly pay for itself in the long run, why does Wall Street want to get rid of it so badly? Why are they going to go bankrupt if they hang on to it, but the U.S. government won’t? Well, it has something to do with the government’s ability to grant itself an extra $1 trillion in debt until those hot properties turn themselves around. What has so drastically over-leveraged investment banks and threatens them with bankruptcy could conceivably be absorbed by the U.S. Treasury, which would likely emerged, if not exactly unscathed, then with a “mere” extra $100 billion of debt.

However, it would also save investment banks that had made very poor (and greedy) investment decisions, allowing them to stay in business. And allowing them to perhaps do it all over again.