Obama and the Freeloading Bankers: Why not go along with the new bailout?

May 02, 2009

President Barack Obama’s economic policies are a big improvement on George W. Bush’s. For starters, his stimulus plan is the first program in ages that actually helps working-class Americans. It doesn’t go far enough, but it beats the GOP’s prescription for more of the same trickle-down policies that caused the global economic collapse. Likewise, Obama’s budget proposals, if enacted, will provide tax cuts and beneficial new spending for low- and middle-income Americans, paid for by the nation’s elite. While the new president has taken positive steps, his plan for another bailout of the largest banks is not one of them.

The current financial crisis is closely related to the housing market. Unregulated mortgage brokers offered home loans at inflated prices to customers who could not afford them. The brokers then bundled the loans into financial packages called “collateralized debt obligations” (CDOs)—though many of the loans had no collateral behind them—and sold them on Wall Street. Thanks to the see- and do-nothings that former President Bush appointed to the Securities and Exchange Commission, many of the largest financial institutions were allowed to buy worthless CDOs, now commonly referred to as “toxic assets.”

The Wall Street titans who bought those loans didn’t fear that they would get in over their heads, because they had developed a new form of insurance called “credit default swaps.” If the banks’ CDOs lost their value because of defaults, the insurance was supposed to kick in and save the day, for the bank anyway. Financial institutions bought and sold default insurance, without having to back that insurance with assets.

(Journalist Mark Sumner further explains credit-default swaps and their role in the economic crisis here.)
It was a crazy system, but you have to admit there was a certain consistency to it: tons of worthless securities, guaranteed by worthless insurance, sanctioned by a president who was an empty suit. The scam blew up when the housing market fell, threatening investors, pensioners, and the entire economy.

So, since the problem is so widespread, why not go along with the new bailout?

Because it continues the same corporate-welfare system that caused the economic crisis. Here, in a nutshell, is the plan, as put forward by the secretary of the treasury, Timothy Geithner: The taxpayers guarantee the value of private investments in troubled banks and, if the investors make money, they keep it. If they don’t, the taxpayers take the loss.

No other creditor would be so indulgent. If the American people are going to fund the bank rescue, then we should own the banks and re-structure them to avoid a repeat of the recent disasters. That would mean replacing the incompetents and racketeers who run those institutions. It would also require that we reinstate the New Deal-era restrictions on the sorts of investments that banks could make.

A voice of reason on this subject is Joseph Stiglitz, a Nobel Prize winner in economics. Stiglitz called the bailout “an absolute mess,” adding that the administration officials who drafted it are “either in the pocket of the banks or they’re incompetent.” The former theory is more likely. Timothy Geithner, the treasury secretary, and Lawrence Summers, the director of the National Economic Council, both have close connections to the banking industry.

In addition to powerful cronies, the top banks are aided by memories of the bankruptcy of Lehman Brothers last September, which triggered a stock market crash. When policymakers see other financial institutions teetering like Lehman Bros. did, they freak like a Republican politician who’s just seen a cop in the men’s room mirror. The financial elite hopes that panic in Congress will lead to another quick give-away without the tough questions ever being asked.

A group called A New Way Forward is organizing opposition to the banking welfare plan. ANWF calls for the government to take over failed financial institutions (a step called nationalization), followed by re-regulation and resale of those banks in smaller increments. Simple nationalization would probably be better, given bankers’ habit of buying the government and turning it into an instrument for emptying your bank account. However, busting up the giant deadbeat banks would be better than Obama’s plan.

Even Alan Greenspan, the former Federal Reserve Board chairman and one of history’s slowest learners, has stated that the government needs to nationalize the banks (though he wants them re-privatized quickly). When a far-rightist like Greenspan can see the need for nationalization, but a Democratic administration refuses to do it, something has gone very wrong. A bailout of the existing bank bosses merely validates their corrupt, destructive behavior. The president and Congress need to hear again from the people who elected them.