Tuesday, March 18, 2008

Bailouts Are Good For You!

In listening to the corporate media yesterday, one might have gotten the impression that the Fed’s recent bailouts were just a private little affair between the Fed and Wall Street; that the only losers in Wall Street’s gambling spree are the employees of Bear Stearns and shareholders who have suffered losses, and not taxpayers and consumers; that they had to bail out the investment bank to prevent systemic economic collapse; that bailouts are good for everyone.

Whether they should or will prevent further economic collapse is an open question. There is no doubt that if more investment banks go under that the pension funds and IRA’s of the well-to-do are threatened, and that there will be further job losses and other adverse effects. The “D” word comes to mind. But what the bailouts really do is help preserve the game, the Wall Street casino, and the financial positions of the rich and relatively well off. The positions of the poor and lower economic classes in our society are largely unaffected, except that either way, their positions will likely worsen. No bailouts for them.

The bailouts at this point are not conventional taxpayer bailouts where taxes paid by average American are being directly transferred to J.P. Morgan and other banks, but the taxpayers and consumers will be affected in other ways. This is how a writer for the New York Times put it:

March 18, 2008
Rescue Puts Credibility of the Fed on the Line

If the rescue effort fails, taxpayers could indirectly wind up having to assume part of the cost. Tax revenue does not pay for the Federal Reserve’s operations, including the rescue effort, because the Fed earns income from its trading operations.
But the Fed does pay the Treasury a regular stream of money every year out of its trading profits, lowering the amount it needs to borrow from outsiders. If the new borrowers on Wall Street are unable to repay, and if the market value of the securities they pledge as collateral continues to drop, the losses will come out of the Fed’s payments to the Treasury

But much worse than that is the inflationary effect of the Fed pumping $400 billion or more dollars into the money supply and economy through the bailouts, not to mention continually cutting interest rates to banks. Here is how Bernanke himself put it way back in 2002 when the bubble economy was humming right along:

Remarks by Governor Ben S. Bernanke

Before the National Economists Club, Washington, D.C.
November 21, 2002

Deflation: Making Sure "It" Doesn't Happen Here 

But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

Now if you are poor, unemployed, retired on a fixed income, or in any other fix where your money is unlikely to expand to keep up with inflation, your dollars are going to buy you less and less. If you couple that with the falling dollar, the rising cost of imports, and ever increasing taxes, your screwed. That’s what Wall Street, their friends at the Fed, and the government condoned deregulated economy are doing for you. Nothing. You will pay for the transgressions of the greedy financiers on Wall Street. But you already knew that—that’s standard in a system called Capitalism for the rich.

Anyway, a much more thorough examination of the situation can be found at a blog called “naked capitalism”

There is a very good list of economy related links called BLOGROLL down on the right side of the page.

Another interesting blog is Katherine Austin Fitt’s blog at:

As for whether bailouts are necessary to prevent economic collapse, read the following by Dean Baker ( http://www.cepr.net/index.php/dean-baker/ ).

A Stock Transfer Tax: The Right Medicine for Wall Street
By Dean Baker

This column was posted on TPM Cafe on March 15, 2008.

Bears Stearns, the Wall Street investment banking giant, is now on life support, being kept alive only by infusions of tens of billions of taxpayer dollars courtesy of the Federal Reserve Board. In the months ahead, it is virtually certain that more of the Wall Street big boys will be pushed to the edge, victims of excessive greed and really bad judgment.

Until about six months ago, Wall Street was at the center of the world-wide neo-liberal push to eliminate government regulation and allow the market to operate unfettered. (This was always more hype than reality as I show in The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer [free download available at http://www.conservativenannystate.org/ ].)
Things are different today. With the banks on the edge of collapse, the bankers are demanding the sort of government help they would deny to working mothers trying to provide their kids with health care, child care, and decent housing and education. Of course the situation is very different. The working mothers are looking for chump change, the Wall Street boys want real money.

While the bankers are claiming to have hostages - they say the financial system and the whole economy will be brought to its knees if we don't meet their demands - they are not telling the truth. We absolutely have an interest in keeping the banks operating in an orderly manner. This can be done without bailouts.
England gave us the model last month when the government took over Northern Rock, a major bank that managed to get itself in serious trouble with bad bets in the mortgage market. The government replaced the top management and put in new people who set about getting its books in order. Once they have this done, the bank will be resold to the private sector.

Northern Rock is still in business. Depositors can get to their money and the bank sill conducts its normal business. There have been no runs in England due to this takeover.

The difference between what happened with Bears Stearns and what happened at Northern Rock is that the managers at Bears Stearns who bankrupted the bank are still calling the shots and collecting their multi-million dollar salaries. The stockholders also have about $4 billion in wealth in a bank that would otherwise be insolvent, if not for the courtesy of the cash infusion from U.S. taxpayers.

Northern Rock gives us the model for getting through this financial crisis. We want to keep the banks operating, but we have absolutely zero interest in giving taxpayer dollars to some of the richest people in the country, who apparently weren't smart enough to handle their own affairs. No nanny state for the rich boys.

In fact, we should look to borrow another policy from the United Kingdom that can help set our financial markets in order. The U.K. imposes a modest stock transfer tax of 0.25 percent on every purchase or sale of a share of stock. This sort of tax would make almost no difference to a typical middle class shareholder. However, a tax of this size, with comparable taxes on various other financial instruments, like options and futures, would put a serious crimp in the money shuffling business that has wrecked so much havoc on the U.S. economy.

Furthermore, such a tax could raise a great deal of money, easily in the neighborhood of 1.0 percent of GDP or $150 billion a year. Imagine that we could finance national health care insurance with a financial transactions tax, or provide quality child care and pres-school education, or build up a green 21st century infrastructure, or maybe just have a nice middle class tax cut of $1,000 per family.

There is no shortage of good uses for the money that could be raised through a financial transactions tax. This is the conversation that the country should be having. Instead of funneling tens or hundreds of billions of taxpayer dollars to the failed wizards of Wall Street, we should be talking about what they can do for us.

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