How the bailout of AIG and the megabanks is changing everything we thought we knew about how democracy and capitalism are supposed to work.
In his New York Times column this morning Frank Rich amplifies the frustration of an Obama voter from California who believes the public anger over the AIG bonuses is Obama’s “Katrina moment” and, like George W. Bush, the new
President is blowing it by being painfully out of touch with what’s going on around him.
The Katrina analogy may fit as it applies to team Obama’s oddly tone-deaf mishandling of the bonus backlash. The AIG bonuses matter because people can at least grasp how absurd they are. But the deeper problem for Obama and all of us lies ahead. It’s a combination of the financial crisis being deeper than we think, and the government’s response being contrary in many important respects to the ideals Obama embraced in his 2008 campaign. Actually, that puts it too mildly. As will be reaffirmed, tomorrow, when the Administration formally rolls out its financial system rescue plan, we, the people, have been enlisted in a grand scheme that continues to ask us to suspend commonly held ideals about justice, democracy and accountability. It’s okay to be angry, we’re told, but we’re also being told we have no choice but to support the plan even though critics like Nobel Laureate economist Paul Krugman say it won’t work.
I’m going to link here to “The Big Takeover,” which is Matt Taibbi’s new epic report for Rolling Stone. I’ll warn you that literally from the first sentence, the piece is unnecessarily vulgar as a work of journalism. But I don’t think Taibbi did this by mistake. The crass language of his article is an attempt to head slap his readers out of complacency. But his article also takes the time and space to look at how we got here. In doing so, Taibbi manages to deliver on his thesis that while people are angry about the financial crisis and the bailout of outfits like AIG, “they’re not pissed off enough.”
His argument is not just that complexity has been a camouflage for unconscionably destructive risk-taking in the markets, but that the Treasury (under both Bush and Obama) and the Federal Reserve have rushed in to use taxpayers to mop up the “toxic” liabilities, while allowing those responsible for the debacle to continue business pretty much as usual.
“As complex as all the finances are,” Taibbi writes, “the politics aren’t hard to follow. By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future.There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS [credit default swap] and CDO [collateralized debt obligation], most of us are financial illiterates. By making an already too-complex economy more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system–transforming a democracy into a two-tiered state, one with plugged in financial bureaucrats above and clueless customers below.”
However much one buys of Taibbi’s angry critique, it’s indisputable that we, as citizens, have had to learn too much, too fast. If you thought it was just enough to get your mind around the sub prime mortgage crisis and the rupture of the housing bubble, then you really aren’t coming to grips with the pain of the fix we’re in. What Taibbi and others are now trying to report on about the largely unseen and essentially unregulated derivatives markets is crucial.
Why? Because these markets–how they were created and allowed to run rampant–are having consequences that dwarf anything we’ve faced since the Great Depression. Notably, Taibbi’s reporting leads him to Joseph Cassano, who worked for Michael Milken before heading up the AIG Financial Products branch that burned down the company and may yet bring down the world’s financial system. Taibbi also reminds us of Sen. Phil Gramm, the folksy senator from Texas who successfully pushed bank and financial service deregulation even after the savings and loan crisis of the 1980s. Gramm’s deregulation successes led both to megabanks like Citi and to the Commodity Futures Modernization Act which, according to Taibbi, “made it impossible to regulate credit swaps as either gambling or securities.”
(I just want to interject here that If you need primers on this subject, you don’t have to start with Taibbi’s thunderbolt. Steve Kroft’s lucid reporting on AIG and credit default swaps for 60 Minutes is very well put together as is Joe Nocera’s splended New York Times column that takes an even more nuanced view of the AIG abuses.)
The credit default swaps that Cassano’s group so recklessly exploited were the insurance contracts sold to purchasers of the collateralized debt obligations comprised of bundled mortgages and other consumer loans. Only for regulatory purposes they weren’t considered insurance, and thus AIG alone booked hundreds of billions of dollars in these transactions outside the regulatory requirements that had been placed upon conventional insurers. Of course, the reason CDS’s and other derivatives weren’t properly regulated is that Wall Street firms used their influence (read campaign contributions) to persuade Congress to remove safeguards and create new loopholes. Now, under Obama’s plan (a continuation of the Bush plan) it appears that you and me and other taxpayers are going to be shouldering the lion’s share of the risks in order to entice new buyers for the seemingly endless supply of toxic assets that the geniuses on Wall Street created.
In his 60 Minutes interview with Steve Kroft this evening, President Obama said he didn’t want the public to “cut off its nose to spite its face” by exacting draconian punishments on Wall Street. He appeared to be playing the role of mediator in trying to amiably explain Main Street to Wall Street and vice-versa. If he wanted to seem like a man who, in private, had kicked a waste basket or expressed maybe a third of the anger that Taibbi radiates in his Rolling Stone article, it didn’t come across.
That surprises me. First, and however you cut it, it’s just grossly unfair for taxpayers to have to bail out private financial institutions who’ve only succeeded in taking us hostage by their own avarice and stupidity. The argument for doing this is that entities like AIG and Citi are just to big to fall without pulling everything else down around them. But this action, this stunning intervention, just can’t be squared with our basic social compact with capitalism, which is that we tolerate the hustling and the guile so long as the risk of such behavior is confined to the assets of the risk takers and their underwriters.
Once you get your head around unregulated derivative transactions generally, and the destruction sown by AIG in particular, it becomes frighteningly clear that capitalism as we knew it just shot itself with a dinosaur killing asteroid and, sadly, our homes and businesses and dreams lived on the same planet. Yes, we’d like to save ourselves. But how is it not madness to think that the way out of this is for us to backstop and protect the same players and escort them back to the casino from whence this came?
We do so much in the justice system with money to economically punish those who harm society by breaking the law, even when the violation doesn’t actually injure anybody else. A $500 fine on someone who’s barely making a living wage is a huge penalty. And, yet, here we’re actually intervening with public assets to reward the companies who devastated our economy. And it looks like the President can’t bring himself to show anguish or fury over this for fear of discouraging investors.
The other disturbing piece here is that–notwithstanding Obama’s expressed commitment to transparency–so much of this has been done in the dark, without meaningful Congressional or public oversight. It’s not just the camouflage of the complexity. Taibbi emphasizes a point made earlier and repeatedly by former Clinton Labor Secretary Robert Reich, that the injections of money by the Federal Reserve dwarf those directly authorized by Congress and, it’s all in secret, no one is being told where the money goes.
This persisting secrecy is only going to inflame the public rebellion that aimed its wrath at the AIG bonuses. In a piece at the Huffington Post on Saturday, renowned economist and social critic Jeffrey Sachs made a strong case for the link between the populist uprising and the broader economic justice issues.
“During the last 20 years Wall Street has had its way with us,” he wrote. “On a bipartisan basis it provided the Treasury Secretaries, filled the regulatory agencies, paid itself unconscionable bonuses, and stuffed campaign coffers. The green knew no bounds. The distortions of public policy–right up to Greenspan’s infamous decision to leave financial regulation up to the firms themselves–have wrecked the world economy.”
There is, Sachs argued, a longstanding appreciation among top economists that “a functioning economic system depends not on greed, but on moral sentiments and an acceptable social contract” between the rich and the rest of us.
Thus, he concluded: “The stalemate over banking has arisen because the [Obama] economics team has been unwilling to take on the bank shareholders and management. It now reportedly plans to clean up the banks’ assets through a new alliance of hedge funds and taxpayer dollars. That simply won’t happen. The public won’t tolerate such games for another round. The public won’t accept more money going into financial bailouts until the banks are clearly being run for public benefit, not for the private gain of undeserving shareholders, management, and traders. America will not right itself until it regains a moral compass in economic affairs. That will require a new generation of financial leaders who will forswear the abuses of the past generation of Wall Street leaders. The faster that the economics team and Congress heed the public call for simple justice and decency in financial matters, and the more rapidly that translates into a true Wall Street clean up, the faster will come the economic recovery.”
I think Sachs has it about right.
–Tim Connor
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