Obama, Banks, and Wishful Thinking

Two Items:

- Just A Reminder. . . :

- Stiglitz: Obama Has Confused Saving the Banks with Saving the Bankers
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Just A Reminder. . . :

Your future, and the future of our society, doesn't depend upon wishful thinking, or rhetoric, it depends upon individual and societal actions that are taken with respect given to the realities we live in, including action by individuals and governments that recognize, and are in accordance with, resource limits, natural law and other scientifically proven principles. Increasing population growth, or population growth that has gone beyond the capacity for the earth's resources to sustain it indefinitely, for example, cannot be sustained, in the same way that price valuations of commodities, salaries, stocks, homes, and etc., cannot be sustained beyond the underlying available resources, and human economy, that support them.
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Democracy Now!

Nobel Prize-Winning Economist Joseph Stiglitz: Obama Has Confused Saving the Banks with Saving the Bankers

http://www.democracynow.org/2009/2/25/stieglitz

We get reaction to President Obama’s speech from Nobel economics laureate and former World Bank chief economist, Joseph Stiglitz. Stiglitz says the Obama administration has failed to address the structural and regulatory flaws at the heart of the financial crisis that stand in the way of economic recovery. Stiglitz also talks about why he thinks Obama’s strategy on Afghanistan is wrong and that Obama’s plan to keep a “residual force” in Iraq will be “very expensive.” On health care, Stiglitz says a single-payer system is “the only alternative.” [includes rush transcript]

Guest:

Joseph Stiglitz, winner of the 2001 Nobel Prize in Economics. He is a professor at Columbia University and the former chief economist at the World Bank. He is the co-author of The Three Trillion Dollar War: The True Cost of the Iraq Conflict.

AMY GOODMAN: To talk more about President Obama’s speech, I’m joined in the firehouse studio by Nobel Prize-winning economist Joseph Stiglitz, professor at Columbia University, former chief economist at the World Bank, and co-author of The Three Trillion Dollar War: The True Cost of the Iraq Conflict.
Welcome to Democracy Now!
JOSEPH STIGLITZ: Nice to be here.
AMY GOODMAN: Your first assessment of the speech last night?
JOSEPH STIGLITZ: Oh, I thought it was a brilliant speech. I thought he did an excellent job of wending his way through the fine line of trying to say—give confidence about where we’re going, and yet the reality of our economy—country facing a very severe economic downturn. I thought he was good in also giving a vision and saying while we’re doing the short run, here are three very fundamental long-run problems that we have to deal.
The critical question that many Americans are obviously concerned about is the question of what do we do with the banks. And on that, he again was very clear that he recognized the anger that Americans have about the way the banks have taken our taxpayer money and misspent it, but he didn’t give a clear view of what he was going to do.
AMY GOODMAN: Let’s go to the clip last night. During his speech, President Obama acknowledged more bailouts of the nation’s banks would be needed, but didn’t directly say, as Joe Stiglitz was saying, whether the government would move to nationalize Citigroup and Bank of America.
PRESIDENT BARACK OBAMA: We will act with the full force of the federal government to ensure that the major banks that Americans depend on have enough confidence and enough money to lend even in more difficult times. And when we learn that a major bank has serious problems, we will hold accountable those responsible; force the necessary adjustments; provide the support to clean up their balance sheets; and assure the continuity of a strong, viable institution that can serve our people and our economy.

Now, I understand that on any given day Wall Street may be more comforted by an approach that gives bank bailouts with no strings attached and that holds nobody accountable for their reckless decisions. But such an approach won’t solve the problem. And our goal is to quicken the day when we restart lending to the American people and American business and end this crisis once and for all. And I intend to hold these banks fully accountable for the assistance they receive, and this time they will have to clearly demonstrate how taxpayer dollars result in more lending for the American taxpayer.


AMY GOODMAN: President Obama on Tuesday night. Joe Stiglitz, is he holding the banks accountable?
JOSEPH STIGLITZ: Well, so far, it hasn’t happened. I think the more fundamental issues are the following. He says what we need is to get lending restarted. If he had taken the $700 billion that we gave, levered it ten-to-one, created some new institution guaranteed—provide partial guarantees going for, that would have generated $7 trillion of new lending. So, if he hadn’t looked at the past, tried to bail out the banks, bail out the shareholders, bail out the other—the bankers’ retirement fund, we would have easily been able to generate the lending that he says we need.
So the question isn’t just whether we hold them accountable; the question is: what do we get in return for the money that we’re giving them? At the end of his speech, he spent a lot of time talking about the deficit. And yet, if we don’t do things right—and we haven’t been doing them right—the deficit will be much larger. You know, whether you spend money well in the stimulus bill or whether you’re spending money well in the bank recapitalization, it’s important in everything that we do that we get the bang for the buck. And the fact is, the bank recovery bill, the way we’ve been spending the money on the bank recovery, has not been giving bang for the buck. We haven’t gotten anything out.
What we got in terms of preferred shares, relative to what we gave them, a congressional oversight panel calculated, was only sixty-seven cents on the dollar. And the preferred shares that we got have diminished in value since then. So we got cheated, to put it bluntly. What we don’t know is that—whether we will continue to get cheated. And that’s really at the core of much of what we’re talking about. Are we going to continue to get cheated?
Now, why that’s so important is, one way of thinking about this—end of the speech, he starts talking about a need of reforms in Social Security, put it—you know, there’s a deficit in Social Security. Well, a few years ago, when President Bush came to the American people and said there was a hole in Social Security, the size of the hole was $560 billion approximately. That meant that if we spent that amount of money, we would have guaranteed the—put on sound financial basis our Social Security system. We wouldn’t have to talk about all these issues. We would have provided security for retirement for hundreds of millions of Americans over the next seventy-five years. That’s less money than we spent in the bailouts of the banks, for which we have not been able to see any outcome. So it’s that kind of tradeoff that seems to me that we ought to begin to talk about.
AMY GOODMAN: So, you say Obama, too, has confused saving the banks with saving the bankers.
JOSEPH STIGLITZ: Exactly.
AMY GOODMAN: Should they all have been fired?
JOSEPH STIGLITZ: Well, I think one has to look at it on a bank-by-bank basis. Clearly, the banks that have not been managed very well, we need to not only fire them, we have to change their incentive structure. And it’s not just the level of pay; it’s the form of the pay. Their incentive structures encourage excessive risk taking, shortsighted behavior. And in a way, it’s a vindication of economic theory. They behaved in the irresponsible way that their incentive structures would have led them to behave.
AMY GOODMAN: Explain that.
JOSEPH STIGLITZ: Well, if you get an incentive structure where you say you get huge pay if things go well, but you don’t pay any consequences if things go badly, and you’re going to look at it only in terms of the profits that you make this year, not the losses that you make next year and the year after, then of course you’re going to try to get a gamble, because if you gamble and you win, you walk off with the money; if you lose, somebody else picks up the losses.
So what happened was, the banks gambled. They gambled very big. They had big profits for four years. But in the fifth year, the losses were greater than all the profits that they had in the first four years. But meanwhile, they walk off with the bonuses based on the four-year performance, and then, the fifth year, they don’t—I mean, it was quite remarkable, they didn’t even—they even got big bonuses for the record losses. Then that’s what, of course, has gotten Americans angry, so that the bonuses were described as incentive pay. But that was all a charade.
But the basic thing is, you know, our bankers are—many of them, not all of them—are, you might say, ethically challenged. But even were not they ethically challenged, the fact is they had incentive structures that led them to behave in the way they did.
AMY GOODMAN: Should the banks be nationalized?
JOSEPH STIGLITZ: Many of the banks clearly should be put into, you might say, conservatorship. Americans don’t like to use the word “nationalization.” We do it all the time. We do it every week.
AMY GOODMAN: Explain.
JOSEPH STIGLITZ: Well, if banks don’t have enough capital so that they can meet the commitments they’ve made to the depositors, at the end of every week the FDIC looks at the balance sheet, and it says, “You don’t have enough capital. You’re not allowed to continue.” And then what they do is they either find some other bank to take it over and fill in the hole, or they take it into government control—it sounds terrible, to take it into government control—and then sell it.
And that’s what other countries have done when they faced this kind of problem—the countries that have done it well. One of the important lessons is this is the kind of thing can be done well, could be done badly. And the countries that have done badly have wound up paying to restructure the bank 20, 30, 40 percent, even 50 percent of GDP. We’re on our way to that kind of debacle. But that shows you how bad things can be, how costly it can be, if you don’t do it well.
AMY GOODMAN: We’re talking to Joe Stiglitz. He won the Nobel Prize in Economics in 2001, professor at Columbia University, former chief economist at the World Bank. We’ll be back with him in a minute.
[break]
AMY GOODMAN: Joe Stiglitz, our guest, he’s the Nobel Prize-winning economist from Columbia University and co-author of The Three Trillion Dollar War: The True Cost of the Iraq Conflict.
So, you’re saying small and big banks are being treated differently.
JOSEPH STIGLITZ: Very much so. The small banks were shut down. The big banks—Citibank, Bank of America—we’re giving huge bailouts.
Most interesting case is actually AIG, not even a bank, and we poured in $150 billion. Originally, they said they only needed $20 billion. And then, every few hours, every few days, the losses got bigger, [inaudible] another $60 billion. Now, that fact, the fact that we keep getting bad news and have to pour money in, should make us really worried. The question is, why did we bail out AIG? What they said is, the reason we bailed it out is if we didn’t bail it out, there would be consequences somewhere else. They didn’t tell us where.
It would make much more sense if we looked at where the consequences were and deal with the problems as they turn out. Just for instance, some of the, quote, “insurance policy derivatives” were not in the United States. The people that would have problems may be gamblers, may be other institutions abroad. Do American taxpayers want to be bailing out institutions abroad? That’s a question we ought to be debating. There may be pension funds that may be hurt. Well, some of the pension funds may be able to withstand it; other pension funds will need to have assistance. But let’s get the money going to where we think it ought to go, rather than this trickle-down approach that we’ve been using with AIG.
AMY GOODMAN: Very quickly, which countries do you think did things well, and which didn’t?
JOSEPH STIGLITZ: Well, Sweden and Norway did things very well back in the end of the ’80s, beginning of the ’90s.
The UK, I think, has been doing it much better than the United States. Its problems are bigger— we have to realize that—because its banking sector was a more important part of the economy, and one of the banks actually had liabilities greater than the GDP of the UK. So it’s going to be facing a very difficult time. But the fact of the matter is, the way Gordon Brown did it, replacing the heads of the banks—it was real sense of accountability there. Government got control and shares commensurate with the money that it was paying in—it wasn’t a giveaway—and now trying to make sure that they start lending, forward-looking. So it’s clearly—they have a much clearer concept of what is needed.
AMY GOODMAN: Why is Obama saving these bankers?
JOSEPH STIGLITZ: Well, we could all guess about the politics. We know one of the problems about American politics is the role of campaign contributions, and that’s plagued every one of our major problems. Under the Bush administration, we couldn’t deal with a large number problems, like the oil industry, like the pharmaceutical, the healthcare, because of the influence of campaign contributions. Now, my view is, one of the problems is that whether it’s because of that or not, it lends an aura of suspicion. The fact that there was so much campaign contributions from the financial sector at least raises the concern.
Now, there is one other legitimate concern, that Wall Street has done a very good job of fear mongering. They say, “If you don’t save us, the whole system will go down.” But, you know, when these banks that I talked about before, when they go down, there’s not even a ripple. The fact is, you change ownership. It happens on airlines all the time. An airline goes bankrupt, a new ownership, financial reorganization—not a big deal. What they’ve succeeded in doing is instilling a sense of fear, so that it’s a kind of paralysis that hangs over what we’re doing. And you could understand a politician. He’s been told if you do one thing, the whole system—the sky is falling, it’s going to fall. That induces political leaders to try to do the smallest incremental step, and that’s what got Japan in trouble.
AMY GOODMAN: And your thoughts on Geithner and Summers? Can they handle this? What do you think of them as the economics team?
JOSEPH STIGLITZ: Well, the question is, are they willing to take the bold measures that are necessary? Everybody keeps saying we need to take bold measures, inaction is not a possibility. That’s not the issue on the table. Action will be taken. The question is, which action? Is the action pouring more money into the banks without any effect on lending, increasing the deficit, which the President talked about, or the actions which could be taken, starting on new banks, looking forward rather than looking to the past, significant financial restructuring?
Are we going to bail out the shareholders, bail out the bankers, rather than focusing on saving the systemically important parts of these institutions? There are some important parts of these institutions that we’ll have to save. The question is, are you going to go do it like with a bludgeon, throw money at it, or are you going to try to do it more surgically and save the parts that need to be saved? And one of the things that went wrong is when we went—let Lehman Brothers go. It caused this enormous trauma. And that’s increased the fear about—but that’s an example of doing things wrong. We didn’t ask the question. There was a systemically important part of Lehman Brothers.
AMY GOODMAN: Which was?
JOSEPH STIGLITZ: Which were the commercial paper that was part of the money market funds that were—people were using like banks, like part of our basic payment mechanism. We could have saved that part and let the gambling part of Lehman Brothers, which is not part of the payment mechanism, go down. And because we took this blunt approach, we failed. And what the financial markets are doing are saying, “You have to save everything, if you’re going to save anything.” And that’s just wrong.
AMY GOODMAN: Tomorrow, President Obama is going to announce plans to cut the deficit in half. Do you think that’s the right way to go?
JOSEPH STIGLITZ: What we have to remember is we are in for almost like—most likely a long and extended downturn. Now, we will eventually recover. That’s not a question. But in 2011, 2012, will we be in a sharp recovery or in a more slow recovery?
One of the lessons from Japan was that in 1997, when they were in the beginning of their recovery, they increased taxes because they wanted to get rid of their deficit, and the economy sank down back into a downturn.
The way to look at it is the following. Right now, in 2009, 2010, we’re talking about, per year, something like a stimulus bill of $350 billion per year. To cut the deficit in half, with a deficit as we go into—without the stimulus is one-and-a-half trillion dollars, so we’re talking about pulling out $600, $700, $750 billion. That’s the reverse of an expenditure, taking out the stimulus and cutting back expenditures by another $600 billion—we’re talking about a turnaround of a trillion dollars. Do you really believe that by 2010, by 2011, 2012, our economic recovery will be so strong that it can withstand that kind of taking out of expenditure? I don’t think so. And so, if you went ahead and did that, we will go back into a downturn.
AMY GOODMAN: Joe Stiglitz, you co-wrote The Three Trillion Dollar War: The True Cost of the Iraq Conflict. Talk about the effect of war on the economic crisis. And now we’re not only talking about Iraq. But your thoughts on increasing the number of troops, intensifying the war in Afghanistan?
JOSEPH STIGLITZ: Well, first, let me say, one of—the President did have two things that I really welcome. And several of the suggestions that we made in our book, he has adopted. For instance, in the past, under the Bush administration, the war was totally funded by—or almost totally funded by emergency appropriations. It was as if every year was a surprise. And he said he’s going to put that on the books so that we can evaluate it, make sure their money is going in the best possible way.
A second thing in our book that was, you know, really—was really, I found, very moving was the way we treat our veterans is terrible. And he said, you know, they fought for us; we have to fully fund the Veterans Administration. So those were really important moves in the right direction.
But on the other side, the move into Afghanistan is going to be very expensive. Things are not going very well. Our European—those who—NATO partners are getting disillusioned with the war. I talked to a lot of the people in Europe, and they really feel this is a quagmire, we’re going into another quagmire. And one of the things that we do talk about in our book is that if you keep a residual force in Iraq, it’s going to be very expensive. That’s the experience that Britain has had. They’ve kept a relatively few troops, and the result of that is the savings that they had hoped weren’t materialized. So that goes back to the part that he talked about at the end of his speech: the deficit. If you’re going to be spending all this money in Afghanistan and in Iraq, that deficit is just going to be that much greater.
AMY GOODMAN: So you think Obama is wrong on Afghanistan?
JOSEPH STIGLITZ: I think so.
AMY GOODMAN: Have you told him? Have you been talking to him?
JOSEPH STIGLITZ: Not on that issue.
AMY GOODMAN: You’ve been talking to him, though?
JOSEPH STIGLITZ: During the primary and the period afterwards in some discussions about what to do with the banks. There were discussions. The—
AMY GOODMAN: Meaning you talked to him—
JOSEPH STIGLITZ: Yeah.
AMY GOODMAN: —on the telephone.
JOSEPH STIGLITZ: Yeah.
AMY GOODMAN: I wanted to get your response—after President Obama spoke, the Louisiana Governor Bobby Jindal gave the Republican Party’s official response. He blasted President Obama’s stimulus bill as an irresponsible piece of legislation.
GOV. BOBBY JINDAL: Democratic leaders in Washington, they place their hope in the federal government. We place our hope in you, the American people. In the end, it comes down to an honest and fundamental disagreement about the proper role of government. We oppose the national Democratic view that says the way to strengthen our country is to increase dependence on government. We believe the way to strengthen our country is to restrain spending in Washington, to empower individuals and small businesses to grow our economy and to create jobs.


AMY GOODMAN: Louisiana Governor Jindal. Your response, Joe Stiglitz?
JOSEPH STIGLITZ: I wish he had taken an economics course. The fact is that when the economy is weak, as it is, you need to stimulate aggregate demand. If you don’t do that, the economy gets weaker. And what’s good about most of Obama’s plan is that it’s creating assets. So, while the liabilities go up—we’re going to have to borrow—we also are creating assets. If we had spent a few billion dollars under the beginning of the Bush administration on the levees in New Orleans, we would not have had to spend so much money in the cleanup, in dealing with the devastation that it brought. That would have been money that would have had an enormous return. $5 billion would have saved $150 billion. And so, that’s an example where there are certain kinds of investments—investments in technology, investments in people—that the private sector can’t do and the government can do in ways that give us a very high return.
AMY GOODMAN: Joe Stiglitz, very briefly, the whole issue of globalization—we’re in the tenth anniversary of the mass protests in Seattle, the Battle of Seattle. What about the questions raised in corporate-led globalization?
JOSEPH STIGLITZ: Well, I think two very important issues. One of them is the model that was behind much of the impetus for that globalization was a model based on free unfettered markets. And we know that model, deregulation, has failed. That was the kind of thinking that led into the problems the United States is in today.
The second point is that while we talk about free and open markets, what the United States has been doing has destroyed a level playing field and will have profound implications for the evolution of globalization going forward.
AMY GOODMAN: And for developing countries?
JOSEPH STIGLITZ: And for developing countries, it’s having a devastating effect. I mean, just a couple days ago, the other American banks were complaining about the huge subsidies that were given to Citibank. They say, “How can we compete when the government is subsidizing Citibank to that extent?” Now, if you think these other American banks that have gotten massive subsidies are complaining, you can imagine the kind of feelings that people have in developing countries that say, “We can’t afford those mega-subsidies. How can we compete against Washington being able to write a check any time anything goes wrong?”
AMY GOODMAN: And healthcare? He’s called for universal healthcare, but he does not call for single-payer healthcare.
JOSEPH STIGLITZ: I think that there are some fundamental problems in the efficiency of our healthcare system. And what we’ve seen is that the private healthcare insurers do not know how to deliver an efficient way.
AMY GOODMAN: Do you support single-payer healthcare?
JOSEPH STIGLITZ: I think I’ve reluctantly come to the view that it’s the only alternative. You know, we’ve tried a lot of other things. And we’ve been—you know, I was in the Clinton administration, and we debated a lot of alternatives, and I’ve watched things as they’ve emerged and, you know, evolved over the last twelve, sixteen years, and I think there’s a growing consensus that the private market exclusion is not going to work.
AMY GOODMAN: Joe Stiglitz, I want to thank you for being with us, the Nobel Prize-winning economist, professor at Columbia University, co-author of The Three Trillion Dollar War: The True Cost of the Iraq Conflict.

Recognizing American "Free Market" Capitalism for the Swindle It Has Become

In This Issue:

- Kuttner and Hudson on Obama’s $789 Billion Economic Stimulus Package and $2.5 Trillion Bank Recovery Plans

- Simon Johnson on Bill Moyer’s Journal

- Roubini: Nationalize the Banks! We're all Swedes Now

- Parenti: Capitalism’s Self-inflicted Apocalypse [An Un-apologetic Socialist View]

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It can be quite difficult for anyone to admit they have been taken, so it is understandable, given the constant mainstream media brainwashing, that Americans are not quite ready to display the normal outrage felt by a people who have discovered that their institutions and allegedly democratic government have played them as complete fools. Having not yet realized how large the swindle that they have been victimized by is, and having been well trained to remain relatively passive in the face of the plutocracy's insults, they don't exercise the powers they have to do something about it. As there are few recent American examples of critical political thinking being rewarded, or examples of any socially acceptable behavior which could actually result in people being freed from their shackles (as many have been trained by the plutocracy to despise any form of protest or resistance), there seems to be not much else for people to do but sit around and stew and spit. As the economic calamity that has been forced upon us deepens, one can only hope that we will wake up and realize the power we have through collective action against those who have perpetrated the crimes that deprive us of what is rightfully ours.

To advance the goal of our understanding of what Wall Street and government have, and are, doing to us with regard to the financial crisis (primarily of their making), I offer the following articles and interviews. I would like to be spending more time writing about this systemic problem that we face, but other pressing responsibilities have fallen into my lap, and there are other priorities I want to attend to, so I will not be posting much in the immediate future. I hope you will take some time to read over these interviews/articles by folks who are far more informed and intelligent than I am. Please do not underestimate the gravity of the situation that is now confronting American democracy and our economy, and please contemplate the threat that unbridled capitalism and financial oligarchy presents to our historic democratic values.

Chris
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Robert Kuttner and Michael Hudson on the Obama Administration’s $789 Billion Economic Stimulus Package and $2.5 Trillion Bank Recovery Plans

http://www.democracynow.org/2009/2/13/robert_kuttner_and_michael_hudson_on

Both the House and Senate are set to vote today on the $789 billion economic stimulus package. The vote follows weeks of political wrangling that culminated in compromise legislation struck on Wednesday. The final size of the package is less than what both the House and Senate originally passed and far smaller than what many economists say is needed. But it still marks the nation’s largest economic rescue program since Franklin Roosevelt launched the New Deal. [includes rush transcript]
Guests:

Michael Hudson, Distinguished Research Professor at University of Missouri, Kansas City. A former Wall Street economist, he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire. His latest article, “Obama’s Awful Financial Recovery Plan,” is online at counterpunch.org

Robert Kuttner, Journalist and economist. He is the co-founder and co-editor of The American Prospect magazine, as well as a Distinguished Senior Fellow of the think tank Demos. His latest book is called Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency.

JUAN GONZALEZ: Both the House and Senate are set to vote today on the $789 billion economic stimulus package. The vote follows weeks of political wrangling that culminated in compromise legislation struck on Wednesday. The final size of the package is less than what both the House and Senate originally passed and far smaller than what many economists say is needed. But it still marks the nation’s largest economic rescue program since Franklin Delano Roosevelt launched the New Deal.

The final bill includes $507 billion in spending programs and $282 billion in tax relief. Independent Senator Joseph Lieberman hailed it as a bipartisan achievement.

SEN. JOSEPH LIEBERMAN: We came a long way in a relatively short time to achieve something big and urgently necessary for our country and our people. And when I say “we,” I mean the President, the House, the Senate, members of both political parties. Everybody gave something in these negotiations to achieve something bigger for our country and our people.

JUAN GONZALEZ: House Democrats have voiced criticism that the final legislation more closely resembles the less-expensive measure approved by the Senate. $20 billion in education funding was cut, along with $30 billion for state governments to prevent reductions in social services to the poor and unemployed. But some key boosts to social programs were preserved, including a $20 billion allotment for food stamps.

Most Republican lawmakers have opposed the stimulus. The partisan divide extended to the White House Thursday, when Senator Judd Gregg of New Hampshire withdrew his nomination as Commerce Secretary. The Republican, Gregg, cited what he called “irresolvable conflicts” with the economic stimulus plan.

SEN. JUDD GREGG: Well, I want to begin by thanking the President for considering me for the position of Secretary of Commerce. This was truly a great honor, and I had felt that I could bring some very positive and instructive things to this administration and was looking forward to that. However, as we proceeded down the road here since the nomination was made, it’s become clear to me that—you know, I’ve been my own person for thirty years. I’ve been a governor, and I’ve been a congressman, I’ve been a senator, made my own decisions, stood for what I believe in. You know I’m a fiscal conservative, as everybody knows, fairly strong one. 

And it just became clear to me that it would be very difficult, day in and day out, to serve in this cabinet or any cabinet, for that matter, and be a part of a team and not be able to be 100 percent with the team, 110 percent with the team. You know, you can’t have a blocking back who only pulls off every second or third play.

JUAN GONZALEZ: Gregg is Obama’s second Commerce pick to withdraw from nomination, following New Mexico Governor Bill Richardson.

Meanwhile, more federal aid for the nation’s banking system is likely on the horizon. In a new report, New York University economist Nouriel Roubini estimates financial firms stand to lose up to $3.6 trillion on troubled loans and devalued assets. Echoing other economists, Roubini concludes the US banking system is “effectively insolvent.”

AMY GOODMAN: For more on the economy, we’re joined now by two guests. Here at the firehouse studio, Michael Hudson, Distinguished Research Professor at University of Missouri, Kansas City. A former Wall Street economist, he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire. His latest article, “Obama’s Awful Financial Recovery Plan.” It’s online at counterpunch.org.

Joining us from Washington, D.C., Robert Kuttner, journalist and economist, co-founder and co-editor of The American Prospect magazine, as well as Distinguished Senior Fellow at the think tank Demos. His latest book is called Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency.

Michael Hudson, let’s begin with you here in New York. Why do you think that Obama’s financial recovery plan is “awful”?
MICHAEL HUDSON: Because it’s not leading to recovery at all. It’s now up to $12 trillion. It’s a giveaway to the banks, to the creditors, without a single penny for actual debt reduction. And I had thought that at least half a percentage point, $50 billion, was going to be to write down troubled mortgage debtors, but it turns out that not a penny of mortgage debt is going to be written down. When the banks have lent more money than a mortgage owes, with 38 percent, the government is going to create its own debt to come in and make up the difference, so the debt is going to continue to grow exponentially, and it’s way beyond the ability of the economy to pay. If people have to pay the amount of debt that they have now, there won’t be any money to buy goods and services, companies will not sell as much, they’ll invest less, they’ll hire less, and they’ll continue to downsize.

And what’s happened is that this is the greatest transfer of wealth really in American history. It’s doubled the American debt. The closest parallel I can think of is William the Conqueror’s conquest of England. He came with a military band, conquered the land and imposed taxes over the whole land, basing it all on the Domesday Book, what—the rent could be squeezed out. In this case, the rip-off has been non-military. The bankers have done insider dealing to get the government to give them or guarantee them $12 trillion of bad loans they’ve made, many of them fraudulent.

And then they’re trying to blame the poor for all this, as if the poor are somehow exploiting the rich by taking out more loans than they can pay. Yesterday, Senator McCain said—he warned that all of this debt was going to be paid by the future generation, and we’re exploiting them. But that’s not how to think of it at all. When you have a debt that goes to a future generation, you have taxpayers paying to bondholders, just like in the nineteenth century you had the western states paying to the eastern states. So what you’ve done is given $12 trillion to the richest one percent—or ten percent of the population, and you’ve indebted the economy and the government to them for the next hundred years. You’ve created a new class of ruling families.

And Obama has—by doing this, he’s broken with every president in history. Whenever the debts have exceeded the ability to pay, they’ve been written down to the ability to pay, either through bankruptcy or through conscious government write-down. But instead of writing down the debts, he says the creditors are not going to lose money, despite what Mr. Roubini said. They may have lost money, but they will be made whole by the government. And that’s crazy. That’s why every economic chart you see, there will be a gradual rise and then a sudden collapse. Everything is turned into a vertical fall. Prices, international shipping, employment, profits, they’ve all hit a wall. And there’s no way that the economy can recover when people have to pay interest and amortization instead of buying goods and services, or companies will have to pay their junk bond holders instead of investing in new equipment.

JUAN GONZALEZ: Let me ask Robert Kuttner—I don’t know if your analysis is as pessimistic of the recovery package. But also, I’d like to ask you why, if everyone agrees that the heart of the original trigger for this crisis was the mortgage crisis, is the—the helping out of homeowners continues to be pushed back in the response to it?

ROBERT KUTTNER: Well, my analysis is somewhat different from Mr. Hudson’s analysis. I don’t think this adds up to $12 trillion, and we can have a little debate about that. But I do think that the plan does not go nearly far enough and, in some respects, is just completely wrongheaded.

I think you have to divide what needs to be done into three areas. Number one, we need to refinance mortgages directly so that aid goes directly to homeowners, and the banks and the bondholders who profited from these Mafia loans take the hit, and homeowners stay in their homes. That’s what Roosevelt did in the ’30s with the Home Owners’ Loan Corporation, where the government refinanced mortgages directly. So that’s the first big problem. They haven’t done anything, and the approach they’re taking, when they do get around to it, is wrong, because it bails out bondholders and bankers rather than homeowners.
Secondly, the stimulus is too small by about a factor of three. Just to take one example, state and local governments are going to be out of revenues to the tune of $400 to $500 billion over the next two years. The money in the stimulus package, about $140 billion. So, you know, these are layoffs of teachers and police and fire and cuts in programs that are completely needless. All the government has to do is write a check, and state and local services can continue.

The biggest problem of all is the Geithner plan to try and bring hedge funds and private equity companies with loans from the Federal Reserve as a way of propping up banks. It’s resuscitating the same system that got us into this mess. It’s totally wrongheaded. All of the economists who I respect, from Joe Stiglitz to Paul Krugman to Nouriel Roubini, all argue that, sooner or later, we’re going to have to nationalize the banks, clean out the bad assets, make the bad actors take a hit, replace corrupt management, and clean the slate so that we start out with new—with viable banks that can get the credit system operating again. And the longer we defer that with more pyramid schemes financed by the Fed or the Treasury or the taxpayers, the deeper the hole is.

You asked the question, why we’re not doing it right. The problem is political. On the one hand, Obama has hired a lot of Bob Rubin’s protégés, who aren’t even advocating the right policy. On the other hand, the Republicans are stonewalling him across the board. And so people like Susan Collins, senator from Maine, who are pretty conservative get to block this thing. The only way to end this blockage is for Obama to go to the country and to become a lot more radical, because the times demand radical solutions.

AMY GOODMAN: We’re talking to economists Robert Kuttner and, here in New York, Michael Hudson. We’ll be back with them in a minute.

AMY GOODMAN: Our guests are two economists. Robert Kuttner joins us from Washington, D.C. His latest book is Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency. Michael Hudson is also with us. He’s here in New York. He has also written many books. His latest article, though, is “Obama’s Awful Financial Recovery Plan.” Juan?

JUAN GONZALEZ: Yeah, Michael Hudson, I’d like to ask you—Robert Kuttner just mentioned the whole issue of the Obama administration attempting to bring in private equity firms to help bail out the system. But isn’t part of the problem of these private equity funds, hedge funds, that they are even less transparent than your average corporation, which at least is filing SEC reports and has boards of directors and has to respond to shareholders to some degree? These are even more of the problem of lack of transparency that we’ve had in the financial system generally.

MICHAEL HUDSON: Well, AIG insurance company has been given $135 billion by the US government to pay hedge fund bets that it was on the wrong side of. Now, to invest in a hedge fund, you have to sign a document with the Securities and Exchange Commission saying you have over a million dollars to lose, and you can lose all your money, and it’s not going to affect your life, that you can take the risk, and you’ll be OK if you lose it all. That’s what you have to do to get a hedge fund.
These are the people who Obama is rescuing, not the people who have less than a million dollars and who really have risked their life in buying the houses, the homes, and losing their jobs. He’s protecting the people who could lose all their money, and they’d function, and not protecting the people who actually need help. That’s the irony of all this.

And it’s almost unprecedented that someone who was elected with an overwhelming mandate for change should then feel that he has to depend on Republicans, whereas you had George Bush come in with maybe a half a percentage point victory and say he has a mandate to make the most sweeping changes in history. There’s a complete disconnect there.

AMY GOODMAN: So how does he get it passed in the Senate then?

MICHAEL HUDSON: How did—

AMY GOODMAN: How would he get his plan passed in the Senate then, if he doesn’t bring some Republicans on board?
MICHAEL HUDSON: A president is able to use a bully pulpit. He had a lot of public—enormous public support. He could have gone to the people, like Roosevelt did, and said, “Here is my plan, and I’m going to protect the workers and American industry who are productive. I’m not going to support the extractive sector.” And instead, he talked as if he was supporting labor, he talked as if he was supporting industry, but all the money he’s been given—has been given to essentially Wall Street and, as Mr. Kuttner said, to Mr. Rubin’s protégés.

And if you want to see a kind of scenario where this is leading, you can look at what Mr. Rubin did in Russia and the Baltic countries and the post-Soviet economies. Right now, they’re all broke, and there’s no visible means of support. And in a way, you could say that countries like Latvia represent a foretaste of what we will be moving towards if the program isn’t drastically inverted to help the actual economy instead of the financial claims on the economy. Finance is extracting the income from the economy, not producing it, and they’re the people who are getting the benefit and getting the guarantees.
AMY GOODMAN: What’s a zombie bank?

MICHAEL HUDSON: Well, it’s very funny. A zombie bank is supposed to be a bank that has negative equity. And the word “zombie” comes basically from parasitology. Everybody—people often say the financial sector is a parasite extracting. But a parasite does more than that. It doesn’t just take nourishment from the host; it takes over the host’s brain, so the host thinks it’s actually part of the host’s body and, in fact, it’s its child, and it nurtures it. And the financial sector represents itself as being part of the economy. Mr. Geithner, two days ago, said that we can’t have a recovery of the economy without making the banks healthy and whole and profitable. And that’s just the wrong thing.

We can’t have a recovery in the economy until we let the banks take the losses and we let the hedge funds essentially take their losses. There was no need to give $135 billion to AIG, which yesterday was raided by Britain’s office of serious crimes for financial fraud, when the US government refused to move against it for fraud. It’s paying the fraudsters instead of paying the victims, and then it’s blaming the victims as if somehow the bank’s a zombie instead of the bank turning the economy into a zombie economy run by insiders in Washington giving themselves what Bloomberg Financial said was $9 trillion two months ago and two days ago an added two-and-a-half trillion, which, to me, makes up $12 trillion, rounding off.

JUAN GONZALEZ: Robert Kuttner, I’d like to ask you—a couple of days ago, the top bankers in the country testified before Congress. I was struck that there was a similar type of testimony conducted by the top bankers in Britain recently before Parliament. The difference was that all of the British bankers are basically out of jobs. They were testifying after losing their jobs, whereas the American bankers, except for John Thain at Merrill Lynch, most of them still have their jobs. Your sense of how the banking CEOs are being dealt with in this country?

ROBERT KUTTNER: Well, they’re being coddled. I mean, if you look at Citigroup, the Treasury has put in $45 billion of direct equity capital into Citigroup. It’s guaranteed another $306 billion of toxic assets. You can buy all of Citigroup for about $25 billion. So the taxpayers effectively own it. What the government ought to do is exercise the rights of ownership, go in there, put a majority of public appointees on the board, get rid of existing management. I think in the case of Citigroup, the best thing you could do is break it up, because it is a zombie bank in the sense of it being insolvent. And most of the large banks are insolvent. Their debts exceed their capital. And what Geithner is doing, he’s trying to just disguise this by one more effort to double down using the same kind of financial razzle dazzle that got us into this trouble. So it would be much cleaner to put these banks into receivership.

And if that sounds radical, it is radical, but it’s important to keep in mind that the FDIC, which is the one agency that’s behaved responsibly in this whole mess, the FDIC does this every day of the week. If a bank that has FDIC insurance goes bust, the FDIC goes in, they shut the thing down, they fire incumbent management, the shareholders lose everything, they take it over as a publicly owned bank. The biggest case of this was a bank called IndyMac in California, one of the worst of the subprime malefactors. And the FDIC went in, and they took it over. They put 150 people in to run it. And now they’re gradually selling it back to private owners. So you could do this with the biggest banks, and I think you need to do it with the biggest banks. It does nothing but defer the day of reckoning and dig the hole deeper to pretend that an insolvent bank can somehow be kept on life supports with more and more infusions of taxpayer money.

AMY GOODMAN: Economist Michael Hudson?

MICHAEL HUDSON: Mr. Kuttner is quite right to single out Citibank and the large banks. What the newspapers call a subprime problem is really a big bank problem. Almost all of this negative equity is concentrated in four or five, maybe ten, of the very biggest banks.

And what have they done with the bailout money? They’ve gone and bought the small and healthy banks, infecting the small healthy banks with their philosophy of salesmanship. Now, on the way over here, at Heathrow Airport, they had the British investigation in Parliament on the BBC television in the lounge. And it turned out that the heads of every one of these British banks who were fired were salesmen. None of them were bankers. They were into just selling. And when I was on Wall Street, that was my experience. They had stopped doing research. They had stopped doing analysis. And what they wanted were people who could sell bonds and sell mutual funds. And the whole idea has turned into salesmanship.

For Citibank, their practice for years was what they called stretching the envelope. And what that means is breaking the law and daring the government to try to move against it, by saying, “If you move against this, if you close us down or prosecute us for stretching the envelope,” such as when Citibank bought—merged with the insurance company in violation of the Glass-Steagall Act, “then we’ll bring the whole economy down in a crisis.” And they’re holding the economy hostage in order to extract this money from the government. That’s the real problem. That’s what frightens the senators, and I’m sure that’s what frightens Mr. Obama, that these guys are threatening to wreck the economy if we don’t give them everything they want.

JUAN GONZALEZ: And, Robert Kuttner, from the perspective of ordinary Americans who are dealing with not only losses of jobs and the situation with the—so many homes now worth less than the mortgages that are out on them, I was struck recently by some of these major banks increasing the interest rates on their credit cards. Now, here you have interest rates in the United States at an all-time low, yet banks like Citibank are charging 21 percent interest on the credit card. They’re increasing the interest rates. How can ordinary Americans have an impact on trying to get the leaders in Washington and the Obama administration to change some course now in this—in their efforts to develop a rescue package?

ROBERT KUTTNER: Well, ordinary Americans should be kicking and screaming. There should be ceilings on what banks can charge on credit cards, like they were in the old days when you had usury laws.

You know, banking, done properly, is very simple. Someone applies for a loan; a loan officer assesses the credit worthiness of that borrower, puts an interest rate on the loan. And the banking system is almost like a public utility. It’s not a big drain on the real economy. It supplies capital and credit to the real economy. And when you get these exaggerated, convoluted schemes that are bets on bets on bets, you create the kind of leverage that then comes crashing down when you have something like subprime. So I think the historic task of this administration is a radical simplification of the banking system so that the banking system doesn’t need to charge 23 and 30 percent on credit cards to try and recoup the loss that it made gambling on subprime bonds.

AMY GOODMAN: I want to ask about the stimulus package. It’s supposed to be voted on today. It is the nation’s largest economic rescue program since FDR. Is it big enough? And talk about the Judd Gregg, as well, Michael Hudson, the [inaudible]—
MICHAEL HUDSON: Well, in any rescue program, the first question is, who’s being rescued? And who’s being rescued are apparently the very wealthy, not the people who one would think is being rescued. And then, how are they being rescued? They’re being rescued by making the lower income brackets pay to the higher income brackets. So this sort of turns everything, the usual Progressive Era idea, upside-down. It’s a regressive idea. And it almost makes you wonder whether America is becoming a failed economy. Mr. Kuttner was right, quite right, when he said you have to transform banking. And if you don’t transform banking along the lines that he and I seem to agree on, then the economy will fail. It’s that serious.

AMY GOODMAN: Robert Kuttner, your response to the economic stimulus plan? Do you think it’s big enough?

ROBERT KUTTNER: I think it’s important that Mr. Hudson and I and your listeners and viewers keep straight the difference between the banking rescue and the stimulus package, which are two very different pieces of legislation. I think it was a real political blunder to put them forward in the same week, because people tend to confuse them.

The banking rescue put forward by Mr. Geithner is a complete disaster. The problem with the stimulus package is not that it helps the wrong people. For the most part, it helps the right people. But it’s too small by a factor of about two-thirds, because the stimulus package is about two-and-a-half percent of GDP per year for two years. The economy is declining at the rate of about five percent of GDP. I mentioned before the state and local government figures, where state and local government is out about three times the revenue that the stimulus package is going to replace. So I think some of the things in the stimulus package are absolutely admirable: down payments on high-speed rail, on clean energy, on infrastructure repair, on food stamps, on unemployment compensation, on public health. But the problem is, even though $789 billion is a huge amount of money, given the scale of this collapse, it’s too small to do the job.

And I think in order to have any effect of any significance, they’re going to have to come back again by April, May, June, maybe as part of the budget process, and put even more money into it. And it is going to take an incredible persuasion job by the chief executive to persuade the American people that you need to spend another trillion, another trillion and a half. And you need to recapitalize the banks, but to do it right, by nationalizing them, but that’s going to take more money, too. And if you think of the controversy that he faced in getting a $789 billion package through Congress, imagine what’s going to happen when he comes back and says, “By the way, we need another trillion and a half.” And he has to be damn sure that that money doesn’t go to bankers, that it goes to ordinary Americans.

AMY GOODMAN: What about Judd Gregg? What’s the politics of this, Robert Kuttner?

ROBERT KUTTNER: Well, this was a miscalculation, a blunder. I think it’s an example of Obama’s excessive tendency to bend over backwards to be bipartisan. And, you know, sometimes when you bend over backwards, things happen that you can’t repeat in family broadcasting. And I think that’s what the Republicans are doing to Mr. Obama. So he’s going to have to do this with Democrats, and he’s going to have to make it embarrassing for Republicans to block him.
Republican senators and congressmen have people—and congresswomen have people in their districts who are hurting, too, just as much as Democratic legislators have people who are hurting. If he goes to the country, the way he did in Elkhart the other day or the way he did in Peoria, and spins out a narrative that ties the suffering of ordinary people to the failed policies that we need to reverse, he can really move public opinion. And he’s got to resolve to do that, and he’s got to think much bigger.

AMY GOODMAN: I want to thank you both for being with us. Robert Kuttner, economist; co-founder, co-editor of The American Prospect magazine; latest book, Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency. Michael Hudson, Distinguished Research Professor at the University of Missouri, Kansas City, former Wall Street economist. “Obama’s Awful Financial Recovery Plan” is his latest article. It’s online at http://www.counterpunch.org/hudson02112009.html.
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Simon Johnson on Bill Moyer’s Journal
February 13, 2009

http://www.pbs.org/moyers/journal/02132009/transcript3.html?print

BILL MOYERS: Welcome to the Journal.

The battle is joined as they say — and here's the headline that framed it: "High Noon: Geithner v. The American Oligarchs." The headline is in one of the most informative new sites in the blogosphere called: baselinescenario.com. Here's the quote that grabbed me:

"There comes a time in every economic crisis, or more specifically, in every struggle to recover from a crisis, when someone steps up to the podium to promise the policies that — they say — will deliver you back to growth. The person has political support, a strong track record, and every incentive to enter the history books. But one nagging question remains. Can this person, your new economic strategist, really break with the vested elites that got you into this much trouble?"

And here's the man who asked that question. Simon Johnson is former chief economist at the International Monetary Fund. He now teaches global economics and management at MIT's Sloan School of Management and is a senior fellow of the Peterson Institute. He is co-founder of that website I quoted — baselinescenario.com — where he analyzes the global economic and financial crisis.

Welcome, Simon Johnson to the Journal.

SIMON JOHNSON: Nice to be here.

BILL MOYERS: What are you signaling with that headline, "Geithner vs. the American Oligarchs"?

SIMON JOHNSON: I think I'm signaling something a little bit shocking to Americans, and to myself, actually. Which is the situation we find ourselves in at this moment, this week, is very strongly reminiscent of the situations we've seen many times in other places.

But they're places we don't like to think of ourselves as being similar to. They're emerging markets. It's Russia or Indonesia or a Thailand type situation, or Korea. That's not comfortable. America is different. America is special. America is rich. And, yet, we've somehow find ourselves in the grip of the same sort of crisis and the same sort of oligarchs.

BILL MOYERS: Oligarchy is an un-American term, as you know. It means a government by a small number of people. We don't like to think of ourselves that way.

SIMON JOHNSON: It's a way of governing. As you said. It comes from, you know, a system they tried out in Greece and Athens from time to time. And it was actually an antithesis to democracy in that context.

But, exactly what you said, it's a small group with a lot of power. A lot of wealth. They don't necessarily - they're not necessarily always the names, the household names that spring to mind, in this kind of context. But they are the people who could pull the strings. Who have the influence. Who call the shots.

BILL MOYERS: Are you saying that the banking industry trumps the president, the Congress and the American government when it comes to this issue so crucial to the survival of American democracy?

SIMON JOHNSON: I don't know. I hope they don't trump it. But the signs that I see this week, the body language, the words, the op-eds, the testimony, the way they're treated by certain Congressional committees, it makes me feel very worried.

I have this feeling in my stomach that I felt in other countries, much poorer countries, countries that were headed into really difficult economic situation. When there's a small group of people who got you into a disaster, and who were still powerful. Disaster even made them more powerful. And you know you need to come in and break that power. And you can't. You're stuck.

BILL MOYERS: Both the "Wall Street Journal" and "The New York Times" reported this week that Obama's top two political aides, Rahm Emanuel and David Axelrod, have pushed for tougher action against the banks. But they didn't prevail. Obama apparently sided with Geithner and the Treasury Department in using a velvet glove.

SIMON JOHNSON: What I read from that is that there is an unnecessary and excessive deference to the experts, or the supposed experts.

And I think the view that a lot of people have in Washington - I live in Washington, I follow this very closely - the view is that you need to rely on the technocrats. And the technocrats are saying, "This is the way to go, and you mustn't be too tough on because banks, because that will have adverse consequences for credits, and for the economy, and for unemployment," and so on and so forth. Those technocrats, if that's what they're saying, are wrong. That is not the right way to deal with this crisis.

There are many find professionals at Treasury with great experience, who have spent their lives working on important issues related to the United States. What we face right now is not a typical U.S. issue. We face a crisis, and the president said this on Monday night, the president said, President Obama said, "We've never seen anything like this since the Great Depression."
Therefore, nobody working now, you know, has any firsthand experience. And he also said, "We may face what we call a lost decade." We've never seen that anywhere other than Japan in the 1990s, right?

And something for Treasury officials to really understand, and to really understand the alternatives - they're not, I mean, with all due respect to them, they're not the ultimate authority. I don't think they're the right people.

The correct people you should be asking this question to are people at the IMF. And I can tell you what they're saying is the policy that we seem to be perusing, of being nice to the banks, is a mistake. The powerful people are the insiders. They're the CEOs of these banks. They're the people who run these banks. They're the people who pay themselves the massive bonuses at the end of the last year. Now, those bonuses are not the essence of the problem, but they are a symptom of an arrogance, and a feeling of invincibility, that tells you a lot about the culture of those organizations, and the attitudes of the people who lead them.

BILL MOYERS: Geithner has hired as his chief-of-staff, the lobbyist from Goldman Sachs. The new deputy secretary of state was, until last year, a CEO of Citigroup. Another CFO from Citigroup is now assistant to the president, and deputy national security advisor for International Economic Affairs. And one of his deputies also came from Citigroup. One new member of the president's Economic Recovery Advisory Board comes from UBS, which is being investigated for helping rich clients evade taxes.

You're probably too young to remember that old song, "Sounds like the Mack the Knife is back in town." I mean, is that what you're talking about with this web of relationships?

SIMON JOHNSON: Absolutely. I don't think you have enough time on your show to go through the full list of people and all the positions they've taken. I'm sure these are good people. Don't get me wrong. These are find upstanding citizens who have a certain perspective, and a certain kind of interest, and they see the world a certain way.

And it's exactly a web of interest, I think, is what you said. And that's exactly the right way to think about it. That web of interest is not my interest, or your interest, or the interest of the taxpayer. It's the interest, first and foremost, of the financial industry in this country.

BILL MOYERS: Do you think that Obama understands how these guys play the game? Let me play you the recording of a conference call "Huffington Post" released this week. One of the top officials of Morgan Stanley is speaking to his colleagues. Here it is.

JAMES GORMAN: I'm going to turn to a topic that I suspect is near and dear to everybody's hearts, which is retention. There will be a retention award. Please do not call it a bonus, it is not a bonus it is an award. The award will be based on '08 full year production. Clearly it would have been cheaper to do it off '09 but we think it's the right thing to do and we've made that decision.

SIMON JOHNSON: What he's basically saying is business as usual. Go about your daily lives. Get the bonuses. Re-brand them as awards. But it really shows you the arrogance, and I think these people think that they've won. They think it's over. They think it's won. They think that we're going to pay out ten or 20 percent of GDP to basically make them whole. It's astonishing.

BILL MOYERS: Why wouldn't they believe that? I mean, when I watched the eight CEOs testify before Congress at the House Financial Services Committee earlier this week, I had just finished reading a report that almost every member of that Committee had received contributions from those banks last year. I mean in a way that's like paying the cop on the beat not to arrest you, right?

SIMON JOHNSON: I called up one of my friends on Capitol Hill after that testimony, and that session. I said, "What happened? This was your moment. Why did they pull their punches like that?" And my friend said, "They, the Committee members, know the bankers too well."

BILL MOYERS: Last year, the securities and investment industry made $146 million in campaign contributions. Commercial banks, another $34 million. I mean, American taxpayers don't have a flea's chance on a dog like that, do they?

SIMON JOHNSON: It a massive problem, obviously. And I do think, though, the good news there are people in the White House - I think the president himself, is aware of this broader issue. And, obviously, the campaign, the Obama campaign was very good at getting small contributions, and trying to minimize the impact of major donors like that.

But, at the same time, these people are throughout the system of government. They are very much at the forefront of the Treasury. The Treasury is apparently calling the shots on their economic policies. This is a decisive moment. Either you break the power or we're stuck for a long time with this arrangement.

BILL MOYERS: When Tim Geithner said, earlier in the week, that the American people have lost faith in some financial institutions and the government, did it occur to you that this was the same man who was president of the New York Fed through much of this debacle?

SIMON JOHNSON: I have no problem with poachers turning gamekeeper, right? So if you know where the bodies are buried maybe you can help us sort out the problem. And I did think the first three or four minutes of what Mr. Geithner said were very good.

As a definition of a problem, and pointing the finger clearly at the bankers, and saying that the government had been slow to react, and, of course, that included himself. I liked that. And then he started to talk about the specifics. And he said, "The compensation caps we've put in place, for the executives of these banks, are strong." And at that point I just fell out of my chair. That is not true. That is factually inaccurate, in my opinion.

BILL MOYERS: That?

SIMON JOHNSON: That this $500,000 limit, and deferred stock, is some kind of restriction on what they do? It's deferred stock, Bill. It's not restricted. You can get as much stock as you want, as soon as you pay back the government, you can cash out of that. That's one.

Second, you can, sorry to get technical, but reset the strike price. This is something you and your and your viewers, you need to hear this one out. Just look for these words, okay, follow them through the press. When you get into trouble, when your company goes down, and you have massive amounts of stock options that aren't worth much anymore, because the stock price has gone down, you say, "Oh, well, we're going to reset our option prices."

And, basically, it means that, at the end of the day, these people are going to walk away with tens if not hundreds of millions of dollars paid for by basically, insurance policy that you and I are providing.

Think of it like this, our taxpayer money is ensuring their bonuses. We're making sure that companies, that banks survive. And eventually, of course, the economy will turn around. Things will get better. The banks will be worth a lot of money. And they will cash out. And we will be paying higher taxes, we and our children, will be paying higher taxes so those people could have those bonuses. That's not fair. It's not acceptable. It's not even good economics.

BILL MOYERS: Are we chumps?

SIMON JOHNSON: We'll find out. Yes, we may be. Okay. It depends on how we play this politically. It depends on what our political system does. It depends, I think, on the level of reaction. The financial system is playing us for chumps, okay? The bankers think we're chumps. We'll find out. We have leadership that can handle this. We'll find out what they do.

BILL MOYERS: There was a moment in the hearings this week, when Senator Bernie Sanders, an independent, the independent senator from Vermont, almost lost his cool. Watch this.

SENATOR BERNARD SANDERS: In 2006 and 2007, Lloyd Blankfein, the CEO of Goldman Sachs, was the highest paid executive on Wall Street, making over 125 million in total compensation. Due to its risky investments, Goldman Sachs now has over 168 billion in total outstanding debt. It's laid off over 10 percent of its workforce. Late last year, the financial situation at Goldman was so dire that the taxpayers of this country provided Goldman Sachs with a $10 billion bailout.

Very simple question that I think the American people want to know. Yes or no, should Mr. Blankfein be fired from his job and new leadership be brought in?

SECRETARY GEITHNER: Senator, that's a judgment his board of directors have to make.
I want to say one thing which is very important. Everything we do going forward has to be judged against the impact we're going to have on the American people and the prospects for recovery. And every dollar we spend will have to be measured against the benefits we bring in terms of-

SENATOR SANDERS: Mr. Secretary, you're not answering my question. You have a person who made hundreds of millions for himself as he led his institution that helped cause a great financial crisis. We have put, as taxpayers, $10 billion to bail him out and we have no say about whether or not he should stay on the job?

SECRETARY GEITHNER: No, I didn't say that. I think there will be circumstances, as there have been already, where the government intervention will have to come with very tough conditions, including changes in management and leadership of institutions. And where we believe that makes sense, we will do that.

BILL MOYERS: Geithner says that's something "his" board of directors, the board of Goldman Sachs, will have to decide. But aren't we all ipso facto stock holders now?

SIMON JOHNSON: We should certainly have a big say over critical matters like this. Like the CEO. Because, two things. First of all, it's our money that kept these banks in business. Not just the treasury recapitalization money, that's relatively small.
It's the financial support provided by the Federal Reserve. Make no mistake about it, if the Federal Reserve hadn't stepped in late September, in dramatic fashion, to prop up organizations like Goldman Sachs, they would be out of business, okay?
It was our money that did that. The Federal Reserve acting on behalf of the American taxpayer. And secondly, Senator Sanders is exactly right. That a CEO, like Lloyd Blankfein, made mistakes, and led his company into deep trouble.

Now, other companies are in deeper trouble. His company was in deep trouble and had to be rescued at that moment. It's absolutely the right way to pose the question. And the answer to Senator Sanders' question is, in my opinion, yes. We should change the leadership of these major banks.

BILL MOYERS: And, yet, Secretary Geithner's chief-of-staff is the former lobbyist for Goldman Sachs. How - serious question - how do they make a dispassionate judgment about how to deal with Goldman Sachs when they're so intertwined with Goldman Sachs' mindset?

SIMON JOHNSON: I have no idea. Of course, the administration, the new administration, has a lot of rules about lobbying. And they have rules that basically say, I think, as understood the rules, when they were first presented, I was very impressed. They basically said, "We're not going to hire lobbyists into the administration. There has to be some sort of cooling off period."

BILL MOYERS: And the next day Obama exempted a number of people from that very rule that he had just proclaimed.

SIMON JOHNSON: Yes. It's a problem. It's a huge problem.

BILL MOYERS: So here's the trillion dollar question that I take from your blog, that I read at the beginning, quote, "Can this person," your new economic strategist, in this case Geithner, "really break with the vested elite that got you into this much trouble?" Have you seen any evidence this week that he's going to be tough with these guys?

SIMON JOHNSON: I'm trying to be positive. I'm trying to be supportive. I like the administration. I voted for the president. The answer to your question is, no, I haven't seen anything. But you know, perhaps next week I will. But right now, as we speak, I have a bad feeling in my stomach.

My intuition, from crises, from situations that have improved, the situations that got worse, my intuition is that this is going to get a lot worse. It's going to cost us a lot more money. And we are going down a long, dark, blind alley.

BILL MOYERS: Let's not leave our public in despair, here at end, Simon. I've read everything you wrote this week, and it comes down to this. We must break the power of the banks and their lobbies. How do we do that?

SIMON JOHNSON: I think it's quite straightforward, in technical or economic terms. At the same time I recognize it's very hard politically, okay? What you need to do is the stress test that, actually, Secretary Geithner outlined in his speech on Tuesday.

BILL MOYERS: Which is?

SIMON JOHNSON: That's where you go and you check the bank's books, and you say, okay, not only do we use market prices, not pretend prices, not what you wished things were worth, what they're really worth, okay, in the market today. We use that to value your loans and the securities that you have, your assets, right?

And we also assess what will happen to the value of the things you own if there's a severe recession. So that's the idea, it's a stress test, like when you go to see the doctor, they put you on a treadmill, and make you run to see how your heart is going to behave under stress.

So you're looking at how the bank's balance sheets will look under stress. And then you say to them, "This is our assessment of the amount of capital you need to cover your losses, and to stay in business, and be able to make loans, through what appears to be a severe recession."

And, as the president said, we may lose a decade. So we've got to be very hard headed, and all the officials forecasters are still too optimistic on that. This is the amount of capital you need. Now you have a month, or two, to raise this amount of capital privately.

And when this was done in Sweden, by the way, in the early 1990s, they did it to three big banks. One of the three was able to go to its shareholders, raise a lot more capital, and stay in business as a private bank, same shareholders. That's an option. Totally fine. However, the ones that can't raise the capital are in violation of the terms of their banking license, if you like.
We have no problem in this country shutting down small banks. In fact, the FDIC is world class at shutting down and managing the handover of deposits, for example, from small banks. They managed IndyMac, the closure of IndyMac, beautifully. People didn't lose touch with their money for even a moment. But they can't do it to big banks, because they don't have the political power. Nobody has the political will to do it.

So you need to take an FDIC-type process. You scale it up. You say, "You haven't raised the capital privately. The government is taking over your bank. You guys are out of business. Your bonuses are wiped out. Your golden parachutes are gone." Okay? Because the bank has failed.

This is a government-supervised bankruptcy process. It's called, in the terminology of the business, it's called an intervention. The bank is intervened. You don't go into Chapter 11 because in that's too messy. Too complicated. There's an intervention, you lose the right to operate as a bank. The FDIC takes you over. I think we agree, everyone agrees, we don't want the government to run banks in this country.

BILL MOYERS: Never done it before.

SIMON JOHNSON: Never done it before. It's not gone well anywhere in the world. And the idea of getting your money out of the bank being like visiting the DMV to get your driver's license, it's not appealing, okay?

That's not what we're going to do. That's not what the Swedes did. That's not the state of the art - it's not what the real banking experts are going to tell you to do. They're going to say, you set it up, you set up the government intervention, and there's various technical ways to do this, so that you re-privatize very quickly.

Now, it might take three months, it might take six months. It'll depend on the overall macro economy turning around. But there's a lot of private money out there. Let's call it private equity.

These people would like to come in and buy these re-privatized banks. You would attach antitrust provisions to this, so the banks are broken up as part of this transaction. Senator Sanders has a great saying. He says, "Any bank that is too big to fail is too big to exist."

And he's exactly right. So, in this transformation, you're bringing in private equity. You're using, I think this is, to me, the right idea, and what we've learned in our country, is you're using part of the powerful financial lobby against another part. You're using private equity, that would do very well in this, against the inbred insider big bankers. And you're doing this in a way so that the taxpayer decides who the new owners are.

The new owners come in and do a lot of the restructuring. They're going to fire all of these managers. I can honestly assure you that. They're going to put in new risk management systems. They're going to have to make the banks smaller. And the taxpayer is going to retain a substantial equity interest. So as these banks recover the value of our investment goes up. And that's how we get upside participation.

BILL MOYERS: So you're not talking about nationalization, are you?

SIMON JOHNSON: I'm talking about a scaled up FDIC intervention. I think we need the FDIC to be empowered. And to have the political support necessary to get this job done.

BILL MOYERS: Splitting this one powerful interest group into competing factions, and taking them on one by one.

SIMON JOHNSON: That is classic oligarchy breaking strategy. Now I do admit that once you've done that, you have to worry about the new oligarchs. That's why you're breaking up the banks. You don't want to just change the owners of banks that are too big to fail, because they'll be coming around in five years for another handout.

The structure or banking system, the concentration of power in big financial institutions has to change. There's a lot of appeal to FDR and what he did in the Great Depression.

I would go back to Teddy Roosevelt 100 years ago, and think about trust busting. Okay? Now, the banks don't violate existing antitrust laws. That's 'cause our antitrust laws are 100 years old and need to be changed, okay? We need to break them up for exactly the same reason that Rockefeller and the oil interests, standard oil, at the end of the 19th century, was too powerful, economically and politically. And it had to be broken up. And breaking it up was the right thing to do. That's where we are with the banks today.

BILL MOYERS: Simon Johnson, thank you for being with me on the Journal.

SIMON JOHNSON: My pleasure.

BILL MOYERS: And if you want to find out even more about how we got into this predicament, let me recommend a documentary running this Tuesday night on public television's premier investigative series, "Frontline." It's called "Inside the Meltdown."

NARRATOR: On September 16th, 2008, all around the world money stopped.
PAUL KRUGMAN: Basically we had a complete shutdown of the world capital markets.
SENATOR CHRISTOPHER DODD: Unless we act within days, the financial system will melt down.
MARK LANDLER: Forces have been unleashed that we couldn't control.
JON HILSENRATH: The entire investment banking model was blown up in a week.
NARRATOR: How did it happen?
BILL BAMBER: Regulators have basically been outgunned and outmanned.
NARRATOR: Who is responsible?
DAVID FABER: Oh my God, these guys don't know what they are doing.
NARRATOR: And what happens next?
SENATOR CHRISTOPHER DODD: It's the economic equivalence of 9/11.
__________

Nationalize the Banks! We're all Swedes Now
By Matthew Richardson and Nouriel Roubini

Sunday, February 15, 2009

http://www.washingtonpost.com/wp-dyn/content/article/2009/02/12/AR2009021201602_pf.html

The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s -- or the United States in the 1930s -- the only way to save it is to nationalize it.

As free-market economists teaching at a business school in the heart of the world's financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains. And while Treasury Secretary Timothy Geithner's recent plan to save it has many of the right elements, it's basically too late.

The subprime mortgage mess alone does not force our hand; the $1.2 trillion it involves is just the beginning of the problem. Another $7 trillion -- including commercial real estate loans, consumer credit-card debt and high-yield bonds and leveraged loans -- is at risk of losing much of its value. Then there are trillions more in high-grade corporate bonds and loans and jumbo prime mortgages, whose worth will also drop precipitously as the recession deepens and more firms and households default on their loans and mortgages.

Last year we predicted that losses by U.S. financial institutions would hit $1 trillion and possibly go as high as $2 trillion. We were accused of exaggerating. But since then, write-downs by U.S. banks have passed the $1 trillion mark, and now institutions such as the International Monetary Fund and Goldman Sachs predict losses of more than $2 trillion.

But if you think that $2 trillion is high, consider our latest estimates at the financial Web site RGE Monitor: They suggest that total losses on loans made by U.S. banks and the fall in the market value of the assets they are holding will reach about $3.6 trillion. The U.S. banking sector is exposed to half that figure, or $1.8 trillion. Even with the original federal bailout funds from last fall, the capital backing the banks' assets was only $1.4 trillion, leaving the U.S. banking system about $400 billion in the hole.

Two important parts of Geithner's plan are "stress testing" banks by poring over their books to separate viable institutions from bankrupt ones and establishing an investment fund with private and public money to purchase bad assets. These are necessary steps toward a healthy financial sector.

But unfortunately, the plan won't solve our financial woes, because it assumes that the system is solvent. If implemented fairly for current taxpayers (i.e., no more freebies in the form of underpriced equity, preferred shares, loan guarantees or insurance on assets), it will just confirm how bad things really are.

Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume. Of course, the economy would still stink, but the death spiral we are in would end.

Nationalization -- call it "receivership" if that sounds more palatable -- won't be easy, but here is a set of principles for the government to go by:

First -- and this is by far the toughest step -- determine which banks are insolvent. Geithner's stress test would be helpful here. The government should start with the big banks that have outside debt, and it should determine which are solvent and which aren't in one fell swoop, to avoid panic. Otherwise, bringing down one big bank will start an immediate run on the equity and long-term debt of the others. It will be a rough ride, but the regulators must stay strong.

Second, immediately nationalize insolvent institutions. The equity holders will be wiped out, and long-term debt holders will have claims only after the depositors and other short-term creditors are paid off.

Third, once an institution is taken over, separate its assets into good ones and bad ones. The bad assets would be valued at current (albeit depressed) values. Again, as in Geithner's plan, private capital could purchase a fraction of those bad assets. As for the good assets, they would go private again, either through an IPO or a sale to a strategic buyer.
The proceeds from both these bad and good assets would first go to depositors and then to debt-holders, with some possible sharing with the government to cover administrative costs. If the depositors are paid off in full, then the government actually breaks even.

Fourth, merge all the remaining bad assets into one enterprise. The assets could be held to maturity or eventually sold off with the gains and risks accruing to the taxpayers.

The eventual outcome would be a healthy financial system with many new banks capitalized by good assets. Insolvent, too-big-to-fail banks would be broken up into smaller pieces less likely to threaten the whole financial system. Regulatory reforms would also be instituted to reduce the chances of costly future crises.

Nationalizing banks is not without precedent. In 1992, the Swedish government took over its insolvent banks, cleaned them up and reprivatized them. Obviously, the Swedish system was much smaller than the U.S. system. Moreover, some of the current U.S. financial institutions are significantly larger and more complex, making analysis difficult. And today's global capital markets make gaming the system easier than in 1992. But we believe that, if applied correctly, the Swedish solution will work here.

Sweden's restructuring agency was not an out-of-control bureaucracy; it delegated all the details of the cleanup to private bankers and managers hired by the government. The process was remarkably smooth.

Basically, we're all Swedes now. We have used all our bullets, and the boogeyman is still coming. Let's pull out the bazooka and be done with it.

Matthew Richardson and Nouriel Roubini, professors at New York University's Stern School of Business, contributed to the upcoming book "Restoring Financial Stability: How to Repair a Failed System."
__________

Capitalism’s Self-inflicted Apocalypse


By Michael Parenti



February 10, 2009

http://www.michaelparenti.org/capitalism%20apocalypse.html

After the overthrow of communist governments in Eastern Europe, capitalism was paraded as the indomitable system that brings prosperity and democracy, the system that would prevail unto the end of history.

The present economic crisis, however, has convinced even some prominent free-marketeers that something is gravely amiss. Truth be told, capitalism has yet to come to terms with several historical forces that cause it endless trouble: democracy, prosperity, and capitalism itself, the very entities that capitalist rulers claim to be fostering.

Plutocracy vs. Democracy

Let us consider democracy first. In the United States we hear that capitalism is wedded to democracy, hence the phrase, “capitalist democracies.” In fact, throughout our history there has been a largely antagonistic relationship between democracy and capital concentration. Some eighty years ago Supreme Court Justice Louis Brandeis commented, “We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can’t have both.” Moneyed interests have been opponents not proponents of democracy.

The Constitution itself was fashioned by affluent gentlemen who gathered in Philadelphia in 1787 to repeatedly warn of the baneful and dangerous leveling effects of democracy. The document they cobbled together was far from democratic, being shackled with checks, vetoes, and requirements for artificial super majorities, a system designed to blunt the impact of popular demands.

In the early days of the Republic the rich and well-born imposed property qualifications for voting and officeholding. They opposed the direct election of candidates (note, their Electoral College is still with us). And for decades they resisted extending the franchise to less favored groups such as propertyless working men, immigrants, racial minorities, and women.

Today conservative forces continue to reject more equitable electoral features such as proportional representation, instant runoff, and publicly funded campaigns. They continue to create barriers to voting, be it through overly severe registration requirements, voter roll purges, inadequate polling accommodations, and electronic voting machines that consistently “malfunction” to the benefit of the more conservative candidates.

At times ruling interests have suppressed radical publications and public protests, resorting to police raids, arrests, and jailings—applied most recently with full force against demonstrators in St. Paul, Minnesota, during the 2008 Republican National Convention.

The conservative plutocracy also seeks to rollback democracy’s social gains, such as public education, affordable housing, health care, collective bargaining, a living wage, safe work conditions, a non-toxic sustainable environment; the right to privacy, the separation of church and state, freedom from compulsory pregnancy, and the right to marry any consenting adult of one’s own choosing. 



About a century ago, US labor leader Eugene Victor Debs was thrown into jail during a strike. Sitting in his cell he could not escape the conclusion that in disputes between two private interests, capital and labor, the state was not a neutral arbiter. The force of the state--with its police, militia, courts, and laws—was unequivocally on the side of the company bosses. From this, Debs concluded that capitalism was not just an economic system but an entire social order, one that rigged the rules of democracy to favor the moneybags.

Capitalist rulers continue to pose as the progenitors of democracy even as they subvert it, not only at home but throughout Latin America, Africa, Asia, and the Middle East. Any nation that is not “investor friendly,” that attempts to use its land, labor, capital, natural resources, and markets in a self-developing manner, outside the dominion of transnational corporate hegemony, runs the risk of being demonized and targeted as “a threat to U.S. national security.”

Democracy becomes a problem for corporate America not when it fails to work but when it works too well, helping the populace move toward a more equitable and livable social order, narrowing the gap, however modestly, between the superrich and the rest of us. So democracy must be diluted and subverted, smothered with disinformation, media puffery, and mountains of campaign costs; with rigged electoral contests and partially disfranchised publics, bringing faux victories to more or less politically safe major-party candidates.

Capitalism vs. Prosperity

The corporate capitalists no more encourage prosperity than do they propagate democracy. Most of the world is capitalist, and most of the world is neither prosperous nor particularly democratic. One need only think of capitalist Nigeria, capitalist Indonesia, capitalist Thailand, capitalist Haiti, capitalist Colombia, capitalist Pakistan, capitalist South Africa, capitalist Latvia, and various other members of the Free World--more accurately, the Free Market World.

A prosperous, politically literate populace with high expectations about its standard of living and a keen sense of entitlement, pushing for continually better social conditions, is not the plutocracy’s notion of an ideal workforce and a properly pliant polity. Corporate investors prefer poor populations. The poorer you are, the harder you will work—for less. The poorer you are, the less equipped you are to defend yourself against the abuses of wealth.

In the corporate world of “free-trade,” the number of billionaires is increasing faster than ever while the number of people living in poverty is growing at a faster rate than the world’s population. Poverty spreads as wealth accumulates.
Consider the United States. In the last eight years alone, while vast fortunes accrued at record rates, an additional six million Americans sank below the poverty level; median family income declined by over $2,000; consumer debt more than doubled; over seven million Americans lost their health insurance, and more than four million lost their pensions; meanwhile homelessness increased and housing foreclosures reached pandemic levels.

It is only in countries where capitalism has been reined in to some degree by social democracy that the populace has been able to secure a measure of prosperity; northern European nations such as Sweden, Norway, Finland, and Denmark come to mind. But even in these social democracies popular gains are always at risk of being rolled back.

It is ironic to credit capitalism with the genius of economic prosperity when most attempts at material betterment have been vehemently and sometimes violently resisted by the capitalist class. The history of labor struggle provides endless illustration of this.

To the extent that life is bearable under the present U.S. economic order, it is because millions of people have waged bitter class struggles to advance their living standards and their rights as citizens, bringing some measure of humanity to an otherwise heartless politico-economic order.

A Self-devouring Beast

The capitalist state has two roles long recognized by political thinkers. First, like any state it must provide services that cannot be reliably developed through private means, such as public safety and orderly traffic. Second, the capitalist state protects the haves from the have-nots, securing the process of capital accumulation to benefit the moneyed interests, while heavily circumscribing the demands of the working populace, as Debs observed from his jail cell.

There is a third function of the capitalist state seldom mentioned. It consists of preventing the capitalist system from devouring itself. Consider the core contradiction Karl Marx pointed to: the tendency toward overproduction and market crisis. An economy dedicated to speedups and wage cuts, to making workers produce more and more for less and less, is always in danger of a crash. To maximize profits, wages must be kept down. But someone has to buy the goods and services being produced. For that, wages must be kept up. There is a chronic tendency—as we are seeing today—toward overproduction of private sector goods and services and underconsumption of necessities by the working populace.

In addition, there is the frequently overlooked self-destruction created by the moneyed players themselves. If left completely unsupervised, the more active command component of the financial system begins to devour less organized sources of wealth.
Instead of trying to make money by the arduous task of producing and marketing goods and services, the marauders tap directly into the money streams of the economy itself. During the 1990s we witnessed the collapse of an entire economy in Argentina when unchecked free marketeers stripped enterprises, pocketed vast sums, and left the country’s productive capacity in shambles. The Argentine state, gorged on a heavy diet of free-market ideology, faltered in its function of saving capitalism from the capitalists.

Some years later, in the United States, came the multi-billion-dollar plunder perpetrated by corporate conspirators at Enron, WorldCom, Harkin, Adelphia, and a dozen other major companies. Inside players like Ken Lay turned successful corporate enterprises into sheer wreckage, wiping out the jobs and life savings of thousands of employees in order to pocket billions.
These thieves were caught and convicted. Does that not show capitalism’s self-correcting capacity? Not really. The prosecution of such malfeasance— in any case coming too late—was a product of democracy’s accountability and transparency, not capitalism’s. Of itself the free market is an amoral system, with no strictures save caveat emptor.

In the meltdown of 2008-09 the mounting financial surplus created a problem for the moneyed class: there were not enough opportunities to invest. With more money than they knew what to do with, big investors poured immense sums into nonexistent housing markets and other dodgy ventures, a legerdemain of hedge funds, derivatives, high leveraging, credit default swaps, predatory lending, and whatever else.

Among the victims were other capitalists, small investors, and the many workers who lost billions of dollars in savings and pensions. Perhaps the premiere brigand was Bernard Madoff. Described as “a longstanding leader in the financial services industry,” Madoff ran a fraudulent fund that raked in $50 billion from wealthy investors, paying them back “with money that wasn’t there,” as he himself put it. The plutocracy devours its own children.

In the midst of the meltdown, at an October 2008 congressional hearing, former chair of the Federal Reserve and orthodox free-market devotee Alan Greenspan confessed that he had been mistaken to expect moneyed interests--groaning under an immense accumulation of capital that needs to be invested somewhere--to suddenly exercise self-restraint.

The classic laissez-faire theory is even more preposterous than Greenspan made it. In fact, the theory claims that everyone should pursue their own selfish interests without restraint. This unbridled competition supposedly will produce maximum benefits for all because the free market is governed by a miraculously benign “invisible hand” that optimizes collective outputs.

(“Greed is good.”)

Is the crisis of 2008-09 caused by a chronic tendency toward overproduction and hyper-financial accumulation, as Marx would have it? Or is it the outcome of the personal avarice of people like Bernard Madoff? In other words, is the problem systemic or individual? In fact, the two are not mutually exclusive. Capitalism breeds the venal perpetrators, and rewards the most unscrupulous among them. The crimes and crises are not irrational departures from a rational system, but the converse: they are the rational outcomes of a basically irrational and amoral system.

Worse still, the ensuing multi-billion dollar government bailouts are themselves being turned into an opportunity for pillage. Not only does the state fail to regulate, it becomes itself a source of plunder, pulling vast sums from the federal money machine, leaving the taxpayers to bleed.

Those who scold us for “running to the government for a handout” are themselves running to the government for a handout. Corporate America has always enjoyed grants-in-aid, loan guarantees, and other state and federal subventions. But the 2008-09 “rescue operation” offered a record feed at the public trough. More than $350 billion was dished out by a right-wing lame-duck Secretary of the Treasury to the biggest banks and financial houses without oversight--not to mention the more than $4 trillion that has come from the Federal Reserve. Most of the banks, including JPMorgan Chase and Bank of New York Mellon, stated that they had no intention of letting anyone know where the money was going.

The big bankers used some of the bailout, we do know, to buy up smaller banks and prop up banks overseas. CEOs and other top banking executives are spending bailout funds on fabulous bonuses and lavish corporate spa retreats. Meanwhile, big bailout beneficiaries like Citigroup and Bank of America laid off tens of thousands of employees, inviting the question: why were they given all that money in the first place?

While hundreds of billions were being doled out to the very people who had caused the catastrophe, the housing market continued to wilt, credit remained paralyzed, unemployment worsened, and consumer spending sank to record lows.
In sum, free-market corporate capitalism is by its nature a disaster waiting to happen. Its essence is the transformation of living nature into mountains of commodities and commodities into heaps of dead capital. When left entirely to its own devices, capitalism foists its diseconomies and toxicity upon the general public and upon the natural environment--and eventually begins to devour itself.

The immense inequality in economic power that exists in our capitalist society translates into a formidable inequality of political power, which makes it all the more difficult to impose democratic regulations.

If the paladins of Corporate America want to know what really threatens “our way of life,” it is their way of life, their boundless way of pilfering their own system, destroying the very foundation on which they stand, the very community on which they so lavishly feed.

Michael Parenti received his Ph.D. in political science from Yale University. He has taught at a number of colleges and universities, in the United States and abroad. He is the author of twenty books: Please visit his website http://michaelparenti.org 

Copyright © 2008 Michael Parenti. All rights reserved.