Saturday, September 20, 2008

Other People's Money

or.. How The Oligarchy Threw Away Free Market Capitalism in Favor of Corporate Welfare

Something has been going on this week. Well, more correctly, something has been going on the past year or so. Ever since the real estate market (predictably!) went south, all sorts of lending institutions have had to deal with bad loans. First, there were the banks themselves. But since the banks had bundled their risky loans and sold them off to investment houses, the bad debts also hit the big investment houses. But that wasn't the end of it. The banks investment houses had gotten the loans insured and so some big insurance companies were in trouble to.

I don't want to rehash all the details here. There are better places to follow the story.

Anyhow, what's happening now? It appears that a lot of rich and powerful people who thought that it was fine and dandy to let people see their houses foreclosed are much less willing to let a bank fail, much less an insurance giant. So, the rich and powerful have decided that the only way out is for the American taxpayer bail them out.

To the tune of $700 billion.

What is shocking is not that Yet Another Bailout of Irresponsible Corporate Leaders has proposed. What is shocking is the instant consensus that This Must Be Done.

Fuck the rich. I get sick of their bullshit.

Anybody who supports this bailout should be required to never again talk about the virtues of "small government" or the need for tax cuts to "stimulate the economy", or any of that right-wing bullshit that has grabbed hold of the Baby Boomer mindset for the past two decades. More than anything else, I'm sick and tired of half-educated twits pretending to understand economics, and then whining about how "unexpected circumstances" led to their decisions to completely fuck over the American taxpayer.

Going back to the beginning: bundling high-risk loans never served to reduce the risk. Not really. One of the basic motivating ideas behind diversifying investments is that, when many high-risk investments are bundled together, the total risk is decreased. However, this theory depends on mutual independence of the risk involved. In the case of high-risk mortgages, it should have been patently obvious that the notion of independent risks was a facade. Indeed, all of the mortgage values depended on the state of the (bubbling!) real estate market, and when the market went down, all of the mortgages became bad debt.

But the really disappointing thing here is the complete acquiescence to the oligarchic view that it is the duty of American taxpayers to hand over $700 billion to the Treasury secretary, for him to use as he sees fit.

The new model for American crony capitalism is: risk whatever the hell you want. If the market bears the risk, you win big time. If it doesn't, and it looks like the industry is in trouble, well, you can just pass on the losses to the American taxpayer.

This isn't capitalism. It is a theory of economic structure that has taken the basic notion of "limited liability" to its obscene logical conclusion.

As usual, it seems the Glenn Greenwald is one of the only people who captures the obscenity of the practice adequately.

...whatever else is true, the events of the last week are the most momentous events of the Bush era in terms of defining what kind of country we are and how we function -- and before this week, the last eight years have been quite momentous, so that is saying a lot. Again, regardless of whether this nationalization/bailout scheme is "necessary" or makes utilitarian sense, it is a crime of the highest order -- not a "crime" in the legal sense but in a more meaningful sense.

What is more intrinsically corrupt than allowing people to engage in high-reward/no-risk capitalism -- where they reap tens of millions of dollars and more every year while their reckless gambles are paying off only to then have the Government shift their losses to the citizenry at large once their schemes collapse? We've retroactively created a win-only system where the wealthiest corporations and their shareholders are free to gamble for as long as they win and then force others who have no upside to pay for their losses. Watching Wall St. erupt with an orgy of celebration on Friday after it became clear the Government (i.e., you) would pay for their disaster was literally nauseating, as the very people who wreaked this havoc are now being rewarded.

More amazingly, they're free to walk away without having to disgorge their gains; at worst, they're just "forced" to walk away without any further stake in the gamble. How can these bailouts not at least be categorically conditioned on the disgorgement of ill-gotten gains from those who are responsible? The mere fact that shareholders might lose their stake going forward doesn't resolve that concern; why should those who so fantastically profited from these schemes they couldn't support walk away with their gains? This is "redistribution of wealth" and "government takeover of industry" on the grandest scale imaginable -- the buzzphrases that have been thrown around for decades to represent all that is evil and bad in the world. That's all this is; it's not an "investment" by the Government in any real sense but just a magical transfer of losses away from those who are responsible for these losses to those who aren't.

And all of this was both foreseeable as well as foreseen -- see the 2002 grave warnings from Warren Buffett on pages 14-15 of his shareholders letter (.pdf), among many other things -- and it's also happened before, when the Federal Government bailed out the S&L industry that (with John McCain's help) was able to gamble recklessly and then force the country to protect them from their losses. The people who did this have no fear of anything -- they completely lack the kind of healthy fear that impedes reckless behavior -- because they know how our Government works and that they control it and thus believe that their capacity to suffer is limited in the extreme. And they're right about that.

What's most vital to underscore is that the beneficiaries of this week's extraordinary Government schemes aren't just the coincidental recipients of largesse due to some random stroke of good luck. The people on whose behalf these schemes are being implemented -- the true beneficiaries -- are the very same people who have been running and owning our Government -- both parties -- for decades, which is why they have been able to do what they've been doing without interference. They were able to gamble without limit because they control the Government, and now they're having others bear the brunt of their collapse for the same reason -- because the Government is largely run for their benefit.

If there is any "pitchfork moment" -- an episode that understandably would send people into the streets in mass outrage -- it would be this. Nobody really even seems to know how much of these losses "the Government" -- meaning working people who had no part in the profits from these transactions -- is undertaking virtually overnight but it's at least a trillion dollars, an amount so vast it's hard to comprehend, let alone analyze in terms of consequences. The transactions are way too complex even for the most sophisticated financial analysts to understand, let alone value. Whatever else is true, generations of Americans are almost certainly going to be severely burdened in untold ways by the events of the last week -- ones that have been carried out largely without any debate and mostly in secret.

Final thought: $700 billion is a hell of a lot of money. Let me put this in perspective....usually I compare any spending proposal to the budget of the NIH, an organization I know well. In this case, we're off by an order of magnitude (or two).

How do I place $700 billion? Well....this is more than the defense budget of the United States of America for 2009.

This is highway robbery. Where is this money coming from? Of course, the government is simply increasing its debt ceiling.

Updated 9/25

Apparently a deal is in the works. Pelosi is quite content to fork over $700 billion to the Bush administration to bail out the reckless bank leaders.

This proposal has the support of something like 8-10% of the country! Why on earth are representatives going along with it? And the big concessions that Pelosi is trumpeting are

(a) she didn't go along with the original language, which would have allowed Paulson to write himself a check for $509 billion with no legal recourse whatsoever (duh!)

(b) There is going to be some provision to limit executive pay.

As a taxpayer, I could care less about (b). What I care about is the massive burden being placed on the taxpayer!

I am fairly certain that this is a simple "stick-up" by arrogant bankers with a wish list. "Give us $700 billion or...the world will blow up!"

I cannot support this step. I'm strongly considering re-registering as an Independent again.

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