Five Essays on the Financial Crisis of 2008
Assignments for the course on Corporate America

compiled by
Professor Francis Feeley
The CEIMSA Archives
(September/October 2008)

“Capitalist Crisis, Marx's Shadow”
by Rick Wolff
copyright Monthly Review, September 2008

Capitalism happens.  When and where it does, capitalism casts its own special shadow: a self-critique of capitalism's basic flaws that says modern society can do better by establishing very different, post-capitalist economic systems.  This critical shadow rises up to terrify capitalism when -- in crisis periods such as now -- capitalism hits the fan.  Karl Marx poetically called that shadow the specter that haunts capitalism.

The so-called financial crisis today is a symptom.  The underlying disease is capitalism: an economic system that weaves implacable and destructive conflict into its production and distribution of goods and services.  Employers and employees need to cooperate to make the economy work, but they are forever adversaries whose conflicts periodically burst into crises.  So it is today.  Capitalism also locks employers into those endless struggles with and against one another that we call competition.  It too periodically erupts into conflicts and crises.  And so it is today.

Employer-employee conflict contributed to today's global capitalist meltdown as follows.  In the 1970s, employers found a way to stop the long-term slow rise in real wages of their employees.  By outsourcing jobs overseas to take advantage of cheaper wages, by drawing US women into the labor force, by substituting computers and other machines for workers, and by bringing in low-wage immigrants, employers drove down their employees' wages even as they produced ever more commodities for sale.  The results were predictable.  On the one hand, company profits soared (after all, workers produced ever more while not having to be paid any more).  One the other hand, after a few years, stagnant workers' wages proved insufficient to enable them to buy the growing output of their labor.  Given how capitalism works, employers unable to sell all that they produce lay off their own employees.  And of course, that only compounds the problem.

Thus, in the 1970s, another capitalist crisis loomed as a bad recession hit hard.  But that crisis was kept short because US capitalism found a way to postpone it: massive debt.  Since employers succeeded in keeping wages from rising, the only way to sell the ever-expanding output was to lendworkers the money to buy more.  Corporations invested their soaring profits in buying new securities backed by workers' mortgages, auto loans, and credit-card loans.  Owners of such securities were thereby entitled to portions of the monthly payments workers made on those loans.  In effect, the extra profits made by keeping workers' wages down now did double duty for employers who earned hefty interest payments by loaning part of those profits back to the workers.  What a system!

Postponing the solution to crisis of the 1970s only prepared the way for the bigger one now.  Booming consumer lending in the 1980s, 1990s, and since 2000, especially in the deregulated financial world of Reagan and Bush America, provoked wild profit-driven excesses and corruption (the stock market "bubble" and then the real estate "bubble').  It also loaded millions of Americans with unsustainable debts.  By 2006, the most stressed borrowers -- "sub-prime" -- could no longer pay what they owed.  This house of debt cards then began its spiraling descent.

Competition among enterprises also contributed to this crisis.  As some banks made big profits rushing to lend to workers, other lenders feared that those banks would use those profits to outcompete them.  So they too rushed into "consumer lending."  To raise the money to make such profitable loans to workers, lenders made expanded use of new types of financial instruments, chiefly securities backed by workers' debt obligations (securities whose owners received portions of workers' loan repayments).  US lenders sold these securities globally to tap into the entire world's cash.  The whole world thus got drawn into depending on a whirlpool: US capitalism propping up its workers' purchasing power with costly loans because it no longer raised their wages.  The competing rating companies (Fitch, Moody's, Standard and Poor, etc.) inaccurately assessed these securities' riskiness.  These companies competed for the business of lenders who needed high ratings to sell the debt-backed securities.  Private and public lenders around the world competed with one another by buying the US debt-backed securities because they were rated as nearly riskless and yet paid high interest rates.

Enterprise competition and employer-employee conflicts -- both core components of capitalism -- have been major causes of today's "financial crisis."  Yet the huge government bailout now proposed by Treasury Secretary Paulson and FED Chairman Bernanke does not address either the problem of stagnant wages or that of competition. Instead the proposed bailout plans to "fix" the financial crisis by throwing vast sums at the big lenders in the hope that they will resume lending and so pull the economy out of its crisis.  Because this "solution" ignores the underlying problems of our capitalist economy, its prospects for success are poor.

No questioning, let alone challenging, of capitalism's role is conceivable for US leaders.  Quite the contrary, their "policies" aim chiefly to preserve capitalism -- largely by keeping its responsibility for the current crisis out of public debate and thus away from political action.  Yet this crisis, like many others, raises Marx's specter, capitalism's shadow, once again.  The specter's two basic messages are clear: (1) today's global financial crisis flows from core components of the capitalist system and (2) to really solve the current crisis requires changing those components to move society beyond capitalism.

For example, if workers in each enterprise became their own collective boards of directors, the old capitalist conflicts between employers and employees would be overcome.  If state agencies coordinated enterprises' interdependent production decisions, the remaining enterprise competition could be limited to focus on rewards for improved performance.  The US government might not just bail out huge financial institutions but also require them to change into enterprises where employers and employees were the same people and where coordination and competition became the major and minor aspects of enterprise interactions.  The US government took over Fannie Mae, Freddie Mac, and AIG, it changed neither the organization of these enterprises nor the destructive competition among them.  That was a tragically lost opportunity.  If the political winds continue to change far enough and fast enough, solutions responding to the current crisis by moving beyond capitalism might yet be tried.
Rick Wolff is Professor of Economics at University of Massachusetts at Amherst. He is the author of many books and articles, including (with Stephen Resnick) Class Theory and History: Capitalism and Communism in the U.S.S.R. (Routledge, 2002) and (with Stephen Resnick) New Departures in Marxian Theory (Routledge, 2006).


“Economic Crisis, Ideological Debates”
by Rick Wolff
copyright Monthly Review, September 2008

In US capitalism's greatest financial crisis since the 1930s Depression, status-quo ideology swirls.  The goal is to keep this crisis under control, to prevent it from challenging capitalism itself.  One method is to keep public debate from raising the issue of whether and how class changes -- basic economic system changes -- might be the best "solution."  Right, center, and even most left commentators exert that ideological control, some consciously and some not.  Hence the debates where those demanding "more or better government regulation" of financial markets shout down those who still "have more confidence in private enterprise and free markets."  Both sides limit the public discussion to more vs less state intervention to "save the economy."  Then too we have quarrels over details of state intervention: politicians "want to help foreclosure victims too" or "want to limit financiers' pay packages" or want to "weed out bad apples in the finance industry" while spokespersons of various financial enterprises struggle to shape the details to their particular interests.

We need to recall that crises always generate "solutions" -- like all those above -- that preserve the basic system.  We also need to advance alternatives not subordinated to the status quo, that open up the discussion by showing the risks of not changing the system and the virtues of doing so.

Let's begin with the issue of government regulation.  Note first that corporations like investment banks, commercial banks, stock and mortgage brokerages, and so on are all run by boards of directors.  These boards -- usually numbering 15 to 25 people -- make all basic corporate decisions.  They hire the millions who do the work, and they tell these employees what to do with the tools and equipment they provide.  Today's financial mess and economic crisis are first and foremost results of decisions by these boards of directors.

In previous economic crises -- especially the 1930s Depression -- financial corporations were subjected to government laws and regulations passed under pressure of mass suffering.  However, the politicians who wrote those laws and regulations soon thereafter allowed financial corporations to evade them, then later to amend them, and finally to eliminate many of them.  Politicians accommodated financial corporations because they were major contributors to their campaigns and major supports of their political careers or because they believed government intervention to always be "bad" for economic wellbeing.  Financial corporations' directors used profits also to hire armies of lobbyists who shaped every government step in deciding whether and how to enforce laws, rewrite regulations, etc.  Thus, US regulators depended increasingly on the financial corporations they supposedly regulated.  Nor should we forget the profits financial corporations have always devoted to "public relations" -- costly campaigns to undermine the very idea of government regulation in school curricula, mass media, politics, and across our culture.  So now we return to square one as deregulated finance -- having done its job of making billions for the industry -- produces another crisis and another set of calls for regulation.

In short, arguing over whether to leave finance to financial corporations or to have government regulate them is no real debate.  In the US, financial corporations' boards of directors have dominated the operations of the financial industries either way.  Since all regulations imposed on US financial enterprises have left their boards of directors as sole receivers and distributors of all profits, the boards used them to evade or gut the regulations.  What the right, center, and left now debate is merely another set of regulations all of which again leave untouched the profits accruing to financial companies' boards of directors.

Finance has been grossly mismanaged by the institution of the corporation under deregulation: hence the crisis.  Responding to this fact requires more than government reregulation.  We need also to change the corporation in basic ways that can avoid or correct financial mismanagement.  Nothing could better assure that new and tougher government regulations might work this time than making the workers inside financial corporations real partners with the government in monitoring and enforcing properly regulated financial activities.

To that end, we propose a radical restructuring of financial corporations.  Their employees at all levels must become major participants in decision-making activity.  That means elevating workers to significant membership on boards of directors and all board committees.  Only then can employees know corporate realities and so make sure financial activities conform to the spirit and letter of regulations.  Only then will inappropriate activities get reported to and investigated by regulators long before they accumulate into today's sort of crisis.  Masses of employees institutionally empowered inside corporate decision-making are the nation's best hope for a better, fairer financial system than we have had to date.

In short, if the US government -- ultimately the tax-payers -- will now pay the costs and take the risks to bail out a failed financial system, then it has the right and obligation to change that system.  We need such changes to avoid repeating the failures of the past.  These changes would also introduce some democracy inside the corporation -- where it has been excluded for too long and with disastrous consequences.

The current debates also fail to face how the underlying economy helped produce the financial mess.  Real wages stopped rising in the US in the 1970s, yet the American psyche and self-image, subject to relentless advertising, was committed to rising consumption.  To enable that, workers with flat wages had to borrow to afford rising consumption.  For the last 30 years loans replaced wages, but rising consumer debt introduces new risks and dangers.  If, simultaneously, politicians use state borrowing to avoid taxing the rich while providing vast corporate subsidies and waging endless wars, the debt problems mushroom.  Aggressive, deregulated financial companies grabbed the resulting "market opportunity" by devising ever more complex, hidden, and dangerously risky ways to profit hugely from the social debt bubble.

A sub-prime economy produced sub-prime wages, sub-prime borrowers, sub-prime lenders, and sub-prime government regulation.  Bailing out and reregulating financiers -- the current plan being debated across the nation -- does far too little too late.  The proposal above exemplifies the much bigger and more basic changes that now need active public discussion.


“Fannie Mae, Freddie Mac : Phase two of financial crisis”
by Jack Rasmus
copyright Z Magazine, September 2008

Despite repeated efforts during the past year by the Federal Reserve (Fed), the U.S. Treasury, regulatory agencies, and global central banks, the current financial crisis has not been contained—let alone resolved. In the months since the Bear Stearns investment bank bailout in March 2008, the instability of the U.S. financial system has continued to deteriorate.

This past July, a second major financial instability event occurred—the near collapse of the two quasi-government housing market agencies, Fannie Mae and Freddie Mac. Like Bear Stearns, the collapse of Fannie/Freddie was barely averted by an announcement from Fed Chair Ben Bernanke and U.S. Treasury Secretary Henry Paulson that the government would bail out the two agencies. Unlike Bear Stearns, the bailout requires Congressional action and its estimated cost may be as high as $300 billion, according to independent estimates. That's nearly ten times the $29 billion bailout cost of Bear Stearns.

Evolution of the Fannie/Freddie Collapse

It is often noted in the business press that Fannie/ Freddie are liable for more than $5.3 trillion of total mortgage debt outstanding, or roughly half of total mortgage debt in the U.S. which totaled $10.6 trillion as of March, according to the U.S. Fed's Flow of Funds data. Less often noted is that since 2001 this same mortgage debt had ballooned from $4.8 trillion to $10.6 trillion. That's an increase of approximately $6 trillion in just 7 years. Between 2003-06 alone mortgage debt recorded a net growth of more than $1 trillion a year. Nearly half of that was "bad" subprime mortgage debt.

While banks and mortgage companies reaped super-profits from multi-trillion dollar mortgage lending during 2003-2006, they simultaneously pushed for the full privatization of Fannie/Freddie. They were not able to achieve that, but were able to keep Fannie/Freddie underfunded and freeze the latter's share of mortgages purchased at no more than 40 percent of the total mortgage market.

But once the subprime mortgage bust began in late 2006, the same banking and mortgage lenders sought to have Fannie/Freddie buy up their bad debt in greater and greater volumes, including their so-called securitized packages of bad subprime mortgages. Fannie/Freddie's bad debt load quickly accelerated. Its share of the mortgage debt market in turn rose rapidly, from less than 40 percent in 2005 to more than 70 percent. By the first quarter of 2008, more than 80 percent of all mortgages issued were purchased or guaranteed by Fannie/Freddie.

Fannie/Freddie's debt load rose quickly, but their funding and reserves on hand to cover the debt did not. By summer 2008 the agencies found themselves with more than $5 trillion in liabilities, of which $1.7 trillion was direct debt, with only $81 billion in reserves.

Created in 1938 to rescue homeowners and mortgages from a similar bout of banking speculation gone bust, in 1968 Fannie/Freddie were partly privatized, which means they were no longer purely government agencies, but became corporations in which private investors purchased stock. Their private investors range from other financial institutions, wealthy independent investors, private equity funds, hedge funds, pension funds, and various foreign banks and institutions. Fannie/Freddie's directly liable debt (called agency debt) of $1.7 trillion (of the total $5.3 trillion) is heavily owned by foreign central banks.

Should Fannie/Freddie collapse, their investors would suffer major financial losses as well as possible defaults and bankruptcies of their own. Foreign central banks would be especially hard hit. That would mean spreading and deepening the financial crisis further, not only in the U.S. but globally.

Investors became concerned that the two agencies could not cover their multi-trillion dollar liabilities with their miniscule liquid funds on hand. With housing prices continuing to fall and foreclosures rising, in early July analysts estimated Fannie/Freddie losses over the coming year of $100 to $300 billion depending on how far housing prices might fall. Investors did what most investors in any company do in such circumstances—they began a wholesale dumping of their Fannie/Freddie stock. The break came on Friday, July 11, as Fannie/Freddie stock prices plummeted by 50 percent.

Amazingly, even though Fannie/Freddie's reserves had been declining throughout the current financial crisis, particularly in the first half of 2008, instead of taking action, U.S. government regulators repeatedly eased the amount of funds the agencies were required to keep on hand to cover emergencies such as that which occurred in July. From 30 percent at the outset of 2008, regulators reduced required reserves to 20 percent and then to 15 percent, with talk of a further cut to 10 percent in September 2008 on the agenda.

An opportunity to do something about the situation arose in mid-May, in the form of proposed housing assistance legislation for homeowners facing foreclosure. But Congress did nothing. Instead, it accepted promises that Fannie/Freddie would voluntarily raise capital to add to their reserves. Even tepid proposals to change the agencies' regulators—a kind of rearranging of deck chairs on the Titanic—failed to pass Congress last spring.

In the days leading up to July 11, government regulators, the Fed, and the Treasury repeatedly proclaimed that the two agencies had sufficient capital, were voluntarily raising more, and that no rescue of the agencies was necessary. Of course, Paulson/Bernanke never bothered to explain how companies with such a collapse in stock prices might be able to raise capital and thus avert the crisis. Even before the near collapse, both agencies were jointly able to raise only $20 billion. By the end of the week of July 7-11, Fannie Mae's stock price was down 76 percent over the previous year, and Freddie's had fallen 83 percent.

Over the weekend of July 12-13, Paulson/Bernanke and regulators did another about-face. When markets opened on Monday, July 14, they announced a plan to guarantee a government bailout of Fannie/Freddie. The plan required neither the Fed nor the Treasury to directly fund the bailout (neither had sufficient funds, in any event). Instead, Congress would be asked to provide the bailout funding. Until such funds were forthcoming, however, the Fed would provide interim emergency loans to the two agencies. Paulson also proposed the U.S. Treasury buy the two agencies' public stock, thus propping up their stock prices, if necessary.

The moribund housing bill, which had earlier failed to pass Congress, was quickly resurrected following July 14. The Bush administration also proposed to repopulate the boards of directors of the two agencies with more Wall Street bankers. And Paulson/Bernanke made public assurances that "all necessary lines of credit" would be open to the agencies until Congress provided more substantial and permanent funding. The Congressional bill that eventually passed in late July ultimately provided for a $300 billion line of credit—just about what is projected by analysts as the total losses of the two companies over the next period. The $300 billion is to be disbursed by the Treasury to Fannie/Freddie as needed, either as loans or as government direct purchases of the companies' stock.

Despite the bailout announcement, a further general fall in the New York stock market and a further crisis in confidence in the banking system and financial institutions followed. The California bank, IndyMac, failed soon after, and stock prices of other regionals like WaMu, National City, and others significantly declined. The Standard & Poor's 500 bank stock index suffered its worst decline since 1989. Many banks and mortgage lending companies now teeter on the edge of default and bankruptcy.

The Strategic Significance of Fannie/Freddie

The near collapse and proposed bailout of Fannie/Freddie represents several important developments in the current financial crisis. First, it means the current financial crisis has not been stabilized, but has actually gotten worse. According to Bill Gross, manager of PIMCO, the world's biggest bond fund, falling U.S. home prices will require financial institutions to write off more than $1 trillion in losses. The two to three million projected foreclosures may even be larger, given the estimated 25 million whose homes are now in negative equity (worth less than the purchased price) and the remaining mortgage costs.

It also means that the Fed, is no longer able to deal with the crisis on its own—as it essentially did with Bear Stearns. It has now clearly passed the buck to Congress. How much more will the bailout cost? According to a July Standard & Poor's estimate, the cost would run somewhere between $420 billion and $1.1 trillion. That compares to the last housing market bailout that occurred in the late 1980s with the Savings & Loan debacle of around $250 billion.

To date the Fed has committed more than $400 billion of its roughly $800 billion to bail out Bear Stearns and prevent the collapse of other banks in the U.S. and abroad. In July it extended prior deadlines to provide special funding to banks and financial institutions still in trouble into 2009 and it will no doubt have to extend that guarantee as the crisis deepens.

The Fed has also lowered interest rates as far as it believes it can—to 2 percent. Its policy of engineering short term interest rate reductions has clearly failed. Lowering rates has not generated a recovery in the real economy or even assisted bank lending much. Banks continue to be reluctant to lend to each other, let alone to other non bank businesses or homeowners. All that lower Fed interest rates have accomplished is to fuel the devaluation of the dollar, feed currency speculators preying upon that devaluation, raise all types of commodity prices in the U.S., and in effect export part of the U.S. slowdown to other economies.

This shifting of the burden for bailing out the financial system to the U.S. Treasury and Congress signals an important shift in capitalist financial strategies for dealing with the crisis. It means monetary (Fed) solutions to the financial crisis have been effectively put on hold. Fannie/Freddie thus represents the shift into the second phase of financial crisis, while Bear Stearns represented the end of the first phase of the crisis.

They also represent a strategic crossroads. It is clear the Fannie/Freddie bailout is inevitable so long as housing prices continue to drop, which they will, foreclosures continue to rise, and housing market losses continue to grow. It remains to be seen how successful a proposed future bailout by Congress and the Treasury will be in stabilizing the two agencies. Should Fannie/Freddie fail to raise at least another $100 billion in capital or should their stock prices continue to decline, the two agencies might be forced to sell assets at fire sale prices. This very same development began occurring at the end of July among investment and commercial banks also unable to raise capital to cover losses. The hybrid giant bank, Merrill Lynch, began fire sales of its assets at the end of the month, dumping $31 billion in bad loans and mortgages for only $7 billion—a move almost certain to be copied by other banks. Fannie/Freddie might not be able to avoid similar action.

Fannie/Freddie also marked the entry of the New York stock markets into clear bear territory. Stock prices have now crossed a threshold. Despite occasional recoveries, they will proceed to decline further. In even typical postwar recessions, stock prices have fallen 30-40 percent. The current recession is anything but normal, so stock prices can be expected to fall at least as far.

Perhaps one of the more important strategic representations of Fannie/Freddie, and one of the least understood, are their tie-ins to the global derivatives markets. There are three critical numbers associated with Fannie/Freddie. First is their total liability of more than $5.3 trillion in mortgage debt. Second is their combined direct so-called agency debt of $1.7 trillion (which is part of that $5.3 trillion total). Third is the more than $2 trillion in derivatives they own, which were taken on to hedge their risks in their mortgage portfolio. The derivatives positions connect them to countless (and mostly unknown) global financial institutions. Were Fannie/Freddie to default or go bankrupt on their direct agency debt, the global impact via the derivatives market would be enormous. The magnitude of the current financial crisis would grow several-fold.

Nationalize the Housing Market?

At this point in the crisis, bailout means the government must get more deeply involved in funding residential housing markets than ever before. Of course, banks and financial institutions don't like that idea at all. That dislike is what lay behind their growing opposition to Fannie/Freddie during the boom times of 2002-06 and their drive to fully privatize the agencies at that time. But privatization is now clearly off the table, while bailout and deeper regulation are on, which raises the fundamental question: should private lenders be involved at all in financing the housing market or should the housing markets in effect be nationalized?

Of course, nationalizing is a stopgap measure designed to temporarily refloat the markets and institutions at taxpayer expense. After they are again financially stable, the idea is to sell them back again to private interests after they can make a profit once more. It's the basic capitalist strategy to "socialize the costs" and "privatize the gains," which is the essential capitalist definition of nationalization. Even Wall Street Journal editorials now advocate that particular definition, arguing the current arrangements represent a "dishonest kind of socialism." Instead, they propose nationalizing Fannie/Freddie in "a more honest form of socialism." That formula for nationalization is essentially what ex-Fed Chair Alan Greenspan recently proposed: take them over, re-stabilize them at direct taxpayer expense, then spin them back into six or seven private finance companies again.

Despite Greenspan and business press pundits raising the capitalist version of nationalization, the idea of a different kind of nationalization is now possible, as it becomes increasingly clear that private financial institutions are the core cause of the crisis and that the "only game in town" to keep things going is direct government control of the housing markets.

Fannie/Freddie, Deflation, and Epic Recession

Financial instability in the U.S. has continued to worsen, not improve. The key question is why was there a second financial blow up with the near collapse of Fannie Mae and Freddie Mac? The answer to that question is the rampant speculative investing that has been plaguing the U.S. economy for some time.

Since the 1980s, speculative investment has been growing in both its weight and mix as a percentage of total investment in the economy. Speculative investment feeds off of, and simultaneously drives up, prices for financial and other assets. The most notable current example is what is now happening with commodity price inflation. But before commodity speculation and inflation, it was housing price inflation and the subprime bubble of 2002-06; before that, the technology stock speculation and price bubble of 1998-2000; and before that, other asset price bubbles in the 1980s and 1990s. Speculative asset price bubbles lead inevitably to speculative asset price busts—i.e., deflation.

Following the July bailout, the troubles at Fannie/Freddie continued to worsen. In August both agencies announced combined additional losses of more than $7 billion, which immediately drove their stock prices to historic lows. Continuing losses and collapsed stock prices will undermine raising sufficient capital to offset expected future losses. The $300 billion bailout may therefore not be enough.

What's been happening with banks and financial institutions in the U.S. over the past year is that housing and other asset prices have continued to fall faster than banks have been able to raise cash and funds from other sources to offset those losses. The bailout of Fannie/Freddie has not resolved in any way the more fundamental housing crisis. Housing prices will continue to fall at least another 20 percent. Foreclosures will continue to rise by the millions for some time, driving the housing price decline. The recent Housing Bill passed by Congress in July addresses only one-tenth of the eventual foreclosures. The bill's $300 billion set-aside to cover Fannie/Freddie losses provides less than a third of total estimated mortgage losses from all sources. In short, the bailout has only temporarily staunched the bleeding—at significant taxpayer expense.

More and more companies now face rising costs due to commodity price inflation and simultaneous falling revenues. Their inevitable response will be mass layoffs, which are coming in 2008 and into 2009. The entire process leads to something called epic recession—a recession that is unlike any previous recession and that is global in character (see Z Magazine, June 2008). Already numerous economies have begun following the U.S. into recession. The UK, Ireland, Spain, Italy, Portugal, and New Zealand have all clearly tipped into recession. Two of the world's other top four economies, Japan and Germany, have joined the downturn as well. The contraction has clearly begun to synchronize globally.

The ultimate driver of the entire process is the unwinding of the excess $21.6 trillion in net new debt added to the U.S. economy since 2001 and the deflation that debt unwinding is now causing. Behind the debt-deflation dynamic, however, lies the growing imbalance of speculative investment in the U.S. that has been building for decades and the even more fundamental causes that have been driving that speculation in turn.

Jack Rasmus's writing on the current financial and economic crisis and related topics is available at


The Free Market Preachers Have Long Practised State Welfare For The Rich
by George Monbiot
copyright The Guardian, September 2008

Bailing out banks seems unprecedented, but the US government's form in subsidising big business is well established


According to Senator Jim Bunning, the proposal to purchase $700bn of dodgy debt by the US government was "financial socialism, it is un-American". The economics professor Nouriel Roubini called George Bush, Henry Paulson and Ben Bernanke "a troika of Bolsheviks who turned the USA into the United Socialist State Republic of America". Bill Perkins, the venture capitalist who took out an ad in the New York Times attacking the plan, called it "trickle-down communism".

They are wrong. Any subsidies eventually given to the monster banks of Wall Street will be as American as apple pie and obesity. The sums demanded may be unprecedented, but there is nothing new about the principle: corporate welfare is a consistent feature of advanced capitalism. Only one thing has changed: Congress has been forced to confront its contradictions.

One of the best studies of corporate welfare in the US is published by my old enemies at the Cato Institute. Its report, by Stephen Slivinski, estimates that in 2006 the federal government spent $92bn subsidising business. Much of it went to major corporations such as Boeing, IBM and General Electric.

The biggest money crop - $21bn - is harvested by Big Farmer. Slivinski shows that the richest 10% of subsidised farmers took 66% of the payouts. Every few years, Congress or the administration promises to stop this swindle, then hands even more state money to agribusiness. The farm bill passed by Congress in May guarantees farmers a minimum of 90% of the income they've received over the past two years, which happen to be among the most profitable they've ever had. The middlemen do even better, especially the companies spreading starvation by turning maize into ethanol, which are guzzling billions of dollars' worth of tax credits.

Slivinski shows how the federal government's Advanced Technology Program, which was supposed to support the development of technologies that are "pre-competitive" or "high risk", has instead been captured by big businesses flogging proven products. Since 1991, companies such as IBM, General Electric, Dow Chemical, Caterpillar, Ford, DuPont, General Motors, Chevron and Monsanto have extracted hundreds of millions from this programme. Big business is also underwritten by the Export-Import Bank: in 2006, for example, Boeing alone received $4.5bn in loan guarantees.

The government runs something called the Foreign Military Financing programme, which gives money to other countries to purchase weaponry from US corporations. It doles out grants to airports for building runways and to fishing companies to help them wipe out endangered stocks.

But the Cato Institute's report has exposed only part of the corporate welfare scandal. A new paper by the US Institute for Policy Studies shows that, through a series of cunning tax and accounting loopholes, the US spends $20bn a year subsidising executive pay. By disguising their professional fees as capital gains rather than income, for example, the managers of hedge funds and private equity companies pay lower rates of tax than the people who clean their offices. A year ago, the House of Representatives tried to close this loophole, but the bill was blocked in the Senate after a lobbying campaign by some of the richest men in America.

Another report, by a group called Good Jobs First, reveals that Wal-Mart has received at least $1bn of public money. Over 90% of its distribution centres and many of its retail outlets have been subsidised by county and local governments. They give the chain free land, they pay for the roads, water and sewerage required to make that land usable, and they grant it property tax breaks and subsidies (called tax increment financing) originally intended to regenerate depressed communities. Sometimes state governments give the firm straight cash as well: in Virginia, for example, Wal-Mart's distribution centres receive handouts from the Governor's Opportunity Fund.

Corporate welfare is arguably the core business of some government departments. Many of the Pentagon's programmes deliver benefits only to its contractors. Ballistic missile defence, for example, which has no obvious strategic purpose and is unlikely ever to work, has already cost the US between $120bn and $150bn. The US is unique among major donors in insisting that the food it offers in aid is produced on its own soil, rather than in the regions it is meant to be helping. USAid used to boast on its website that "the principal beneficiary of America's foreign assistance programs has always been the United States. Close to 80% of the USAid's contracts and grants go directly to American firms." There is not and has never been a free market in the US.

Why not? Because the congressmen and women now railing against financial socialism depend for their re-election on the companies they subsidise. The legal bribes paid by these businesses deliver two short-term benefits for them. The first is that they prevent proper regulation, allowing them to make spectacular profits and to generate disasters of the kind Congress is now confronting. The second is that public money that should be used to help the poorest is instead diverted into the pockets of the rich.

A report published last week by the advocacy group Common Cause shows how bankers and brokers stopped legislators banning unsustainable lending. Over the past financial year, the big banks spent $49m on lobbying and $7m in direct campaign contributions. Fannie Mae and Freddie Mac spent $180m in lobbying and campaign finance over the past eight years. Much of this was thrown at members of the House financial services committee and the Senate banking committee.

Whenever congressmen tried to rein in the banks and mortgage lenders they were blocked by the banks' money. Dick Durbin's 2005 amendment seeking to stop predatory mortgage lending, for example, was defeated in the Senate by 58 to 40. The former representative Jim Leach proposed re-regulating Fannie Mae and Freddie Mac. Their lobbyists, he recalls, managed in "less than 48 hours to orchestrate both parties' leadership" to crush his amendments.

The money these firms spend buys the socialisation of financial risk. The $700bn the government was looking for was just one of the public costs of its repeated failure to regulate. Even now the lobbying power of the banks has been making itself felt: on Saturday the Democrats watered down their demand that the money earned by executives of companies rescued by the government be capped. Campaign finance is the best investment a corporation can make. You give a million dollars to the right man and reap a billion dollars' worth of state protection, tax breaks and subsidies. When the same thing happens in Africa we call it corruption.

European governments are no better. The free market economics they proclaim are a con: they intervene repeatedly on behalf of the rich, while leaving everyone else to fend for themselves. Just as in the US, the bosses of farm companies, oil drillers, supermarkets and banks capture the funds extracted by government from the pockets of people much poorer than themselves. Taxpayers everywhere should be asking the same question: why the hell should we be supporting them?

“An Emergency Bailout Plan That Americans Will Love”
by Jonathan Tasini (September 2008)

There is a great economic emergency looming in our country. But, it seems to me that we­ or at least our elected leaders­ have only looked at one side of the crisis, that of the housing bubble-inspired financial credit crunch. By doing so, we’ve missed the bigger picture and the solutions needed. So, here is one person’s take on the Emergency Economic Bailout package that will heal the economy.
As quick background, let’s consider this:

24.5 percent of all Americans earn poverty wages ($9.60 or less)

10 percent of all Americans­15 million Americans­ earn $6.79 or less

33.3 percent of African American works and 39.3 of Hispanic workers earn poverty wages.

The share of our entire national income hoarded by the top one percent is, as of 2005, 21.8 percent. The last time it was that high was in 1928 (23.9)­just as the Great Depression was about to hit with its full fury.

We accept poverty as a fact of life in this country­ partly because workers have not gotten the fair share of their hard work over the past three decades (in Republican and Democratic Administrations). If productivity and wages had kept their historic link (meaning, as workers were more productive, that translated into higher pay checks), the MINIMUM WAGE in the country would be $19.12. Yes, $19.12.

At the recent new minimum wage of $6.55 an hour, if you worked every single day, 40 hours a week, with no vacations, no holidays, no health care and no pension, you would earn the grand sum of $13.624. The POVERTY LEVEL for a family of three is $17,600.

47 million Americans have no health care and tens of millions more have inadequate or costly health care that can bankrupt them.

Since 1978, the number of defined-benefit plans ­that means, pensions that give retirees a promised monthly amount­ plummeted from 128,041 plans covering some 41 percent of private-sector workers to only 26,000 today. It’s a Dog Food Retirement future for millions of people.

All those numbers above do relate to the more narrow crisis in a very specific way: without being able to rely on their pay checks to survive, a lot of people got sucked into the housing bubble mania as an economic coping mechanism. Home equity credit lines substituted for decent pay, retirement and affordable, quality health care. And we know the rest.

So, here is what I think is a more comprehensive economic rescue plan, all of which should be attached to any new "bailout" proposal:

1. Immediately raise the minimum wage to $10 an hour, with additional increases over the fives years following raising the minimum wage to $20, which will begin to return some justice and return to workers’ sweat of the brow.

2. Pass HR676, Medicare for All legislation to  (Rep. John Conyers is the main sponsor of the bill). Aside from the moral issue of covering every single American and making health care a right not a privilege, it would save the economy hundreds of billions of dollars and immediately make American-based companies competitive around the world with companies operating from countries with national health care.

3. Create a national guaranteed universal pension plan, backed by the government, so people can be sure that their retirement years will not be threatened by the wild swings of Wall Street.

4. Repeal the Bush tax cuts now and raise the top two income tax rates to 40% and 45%, add a new 50% income tax bracket for those with taxable income over $1 million, and tax investment income as ordinary income. Frankly, that is pretty modest and should only be the first step in rediscovering a progressive taxation system ­but it will still raise several hundred billion dollars this year to finance a variety of public investments. The very people who have enriched themselves in the deregulation orgy of the past couple of decades should pay to repair the country.

5. A couple of years ago, when I was involved in a little political race of my own, I latched on to this idea: a tiny transactions tax on stock sales. It would be so miniscule that the small investors would never feel it, say, 0.25 percent of the sale. It would raise about $150 billion. Wall Street benefits from government protections, not the least of which is a regulatory system (oh, there I go using that "regulation" word, which now seems to be back in vogue) that prevents, in theory, fraud and crazy speculation (ok, so that doesn’t always work out well). Plus, such a tax might also exercise some restraint, perhaps modest, on the wild and crazy big trades made on rumors and the thirst for a quick buck. But, the main point is shared responsibility. You live in this society and, so, you make a contribution. And that contribution is relatively modest and relatively painless.

6. The Employee Free Choice Act. There is no better middle-class jobs program than unionization. Period.

  The point of these suggestions is not just moral but common, economic sense. The way to avoid, to some extent, speculation and crazy amounts of debt is to take away the victims that are preyed on by banks, unscrupulous investors and free-market pirates. If a person has a decent income, real health care, a secure retirement and a government that can invest in the country, he or she is less likely to feel the need to latch on to risky investments and get-rich-quick schemes (also known as day-trading).

My guess is the American people would feel pretty good about a deal that included the above. To those, I’d add two specific pieces about the current mess:

First, any investment of money in banks is done on a debt-for-equity swap. No bailouts. As Nouriel Roubini and my friend Dean Baker have both pointed out, there is no justification or economic logic to bailout banks as a solution to the crisis we find ourselves in. Roubini writes, in arguing that the buying up bad assets is the exception, not the rule, and:
So this rescue plan is a huge and massive bailout of the shareholders and the unsecured creditors of the financial firms (not just banks but also other non bank financial institutions); with $700 billion of taxpayer money the pockets of reckless bankers and investors have been made fatter under the fake argument that bailing out Wall Street was necessary to rescue Main Street from a severe recession. Instead, the restoration of the financial health of distressed financial firms could have been achieved with a cheaper and better use of public money.
Second, as I’ve argued, we should own Freddie Mac and Fannie Mae. We need those two huge institutions to be boring and predictable, not participating in crazy leveraging and speculation. The only way to guarantee that is by installing publicly accountable board members who will run the companies for the benefit of homeowners, not profiteers.