Embattled Treasury Secretary Timothy Geithner's latest poorly-received plan involves bailing out failing banks in ways that enrich the same sort of hedge fund managers and Wall Street high-rollers who helped bring about the current mess. The plan, scheduled to be announced this Monday morning, aims, in part, to plead with private investors to buy up banks' "toxic" assets -- while saddling taxpayers with most of the risk if the assorted shaky investment vehicles turn out to be worthless or unsellable.
The mounting populist rage against Geithner and the failed bank bailouts, along with the obscene bonuses to AIG executives, helped fuel protests last week by union supporters and progressives to promote the message: "Take Back the Economy". What's particularly outrageous, union supporters contend, has been the willingness of government officials to pay huge bonuses and payouts to Wall Street firms and banking executives, but demand sharp sacrifices in wages and benefits by autoworkers -- both with the supposed aim of helping an economic recovery.
The aim of the new union-backed populist uprising is to fight back against the same corporate interests that helped wreck the economy -- and are now working overtime to block the recovery by scheming against raised living standards for workers, activists say. How do corporate lobbyists and their GOP allies allegedly seek to do this? By opposing the pro-union Employee Free Choice Act (or offering "compromise" proposals to essentially gut the bill), and fighting against affordable health care for all.
(Big Business continues to spew fear-mongering lies about the pro-union bill -- although even The Wall Street Journal finally admitted the bill wouldn't take away the secret ballot -- while progressives are fighting back with grass-roots campaigns and some new advertising. But they've also got an important weapon the anti-union opposition can't match: the truth about the bill's provisions and its economic impact, as summarized recently by the Center For American Progress Action Fund's overview report, "Employee Free Choice Act 101.")
Yet even as there's continuing rage against anti-union bankers and Wall Street executives, and their convoluted scams to fleece the public, the ongoing scandal has never been more clearly -- or angrily -- presented than in an important new Rolling Stone article. This darkly humorous, profane article, "The Big Takeover," by Matt Taibbi not only explains what went wrong and how we're continuing to be looted, but makes you want to do something about it -- although there isn't yet a well-organized, focused progressive campaign to fight for wide-ranging banking reform that, yes, involves additional federal spending but actually helps the economy and struggling Americans get back on their feet.
The article comes as a revelation even if you've followed such series as The New York Times' "The Reckoning" and know the broad outlines of the meltdown story: how greedy investors and Wall Street firms built a financial empire of sand based on nearly worthless mortgage-backed securities and then exploited the $700 billion in bank bailouts. It also includes fresh behind-the-scenes reporting on key wrongheaded decisions by federal regulators that freed financial institutions to take literally insane risks with investors' and depositors' funds, and he explains the little-known trillions of dollars in guarantees already being doled out by the Federal Reserve to banks in addition to the TARP and other mishandled bailout programs. His barbed, sometimes vulgar, comments are backed up with solid reporting and the most accessible, even entertaining, writing on the financial crisis to date:
It's over -- we're officially, royally fucked. No empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. It happened when Treasury Secretary Timothy Geithner was forced to admit that he was once again going to have to stuff billions of taxpayer dollars into a dying insurance giant called AIG, itself a profound symbol of our national decline -- a corporation that got rich insuring the concrete and steel of American industry in the country's heyday, only to destroy itself chasing phantom fortunes at the Wall Street card tables, like a dissolute nobleman gambling away the family estate in the waning days of the British Empire.
The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American corporate history -- some $61.7 billion. In the final three months of last year, the company lost more than $27 million every hour. That's $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG's 2008 losses).
So it's time to admit it: We're fools, protagonists in a kind of gruesome comedy about the marriage of greed and stupidity...
Despite this pessimism, many progressive and centrist economists still believe that the current banking and credit crisis could be remedied by strong, bold steps involving a temporary take-over of the most troubled banks, but so far, Geithner's response has been more Hank Paulson than Barack Obama. Geithner and most of Obama's top economic advisers have apparently been spooked by Wall Street traders and the Republican opposition, so they are frightened not only of the word "nationalization," but of the concept of a Swedish-style banking recovery.
Nobel Prize-winner Paul Krugman is just one of several leading economists who have gone after Geithner's banking bailout plans with increasing despair in their recent writings:
The plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad -- I mean misunderstood -- assets...In effect, Treasury will be creating -- deliberately! -- the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn't, that's someone else's problem.
The American Prospect's Robert Kuttner added:
The problem, of course, is larger than Geithner. The entire Obama economic team is far too close to Wall Street and far too much a continuation of the Paulson approach. And though Geithner is primed to take the fall, the plan is the work of senior economic strategist Larry Summers as much as it is Geithner's.
The grave political and economic risk is that Obama continues to let Summers and Geithner lead him down the garden path; the industry-oriented mortgage rescue saves too few homeowners; housing remains in the doldrums and mortgage securities with it; the hedge funds and private equity companies make some money with government guarantees, but the banking system remains comatose; and Republicans increasingly become the instruments of public anger.
For the moment, the president is a prisoner of this thinking and these appointees. If this were merely The West Wing, it would be the stuff of terrific drama. But alas, it's reality; and we all will live with the consequences.
What most progressive and even centrist economists and analysts favor is a form of temporary receivership (or short-term nationalization) to oversee the failing backs, shore them up when possible, and sell off their weakest holdings. As Kuttner wrote in The Huffington Post:
The alternative course, which is winning converts across the political spectrum, is a variant on the Reconstruction Finance Corporation of the Roosevelt era. With an R.F.C. temporarily taking over the insolvent banks, you wouldn't have to bribe hedge funds and private equity companies to speculate on toxic securities. Government would take over zombie banks and use government auditors to determine just how much new money was required to bring a vastly simplified financial system back to life...The process would have far greater simplicity and transparency. And it would be far more likely to get the banking system working again, more quickly and at less public expense.
In contrast, Geithner's latest ineffective, Rube Goldberg-style plan is a much bigger risk to the hoped-for economic recovery than the $165 million in bonuses given to AIG's executives who helped sink the economy with their bad bets on mortgage-related securities. And the pro-corporate insider favoritism of Geithner's approach underscores the need for a strong union movement to serve as a countervailing force against the untrammeled corporate greed that brought on the economic meltdown in the first place. As Mike Elk of the Campaign for America's Future has observed:
Corporate greed has gone unchecked recently in part due to the decline of the labor movement. Is it a coincidence that union membership declined dramatically from 20 percent of the private sector workforce in 1980 to just over 7 percent in 2006 while CEO pay has increased from 42 times what the average worker made in 1980 to 364 in 2006? Unions demand an economy that works for all, not just those at the top, such as AIG executives. As William Greider, author of the Soul of Capitalism, told me, "Unions are an honest broker in the economy."
Even after Geithner announces his plans this week, there's still a chance that the fury over those AIG bonuses and bungled bailouts, if channeled into real economic, labor rights and health-care reform, could turn out to be one of the few positive developments emerging from this current economic debacle.