Web Only / Features » September 22, 2008
The $700 Billion Questions
Wall Street and Washington’s wrecking crew aim to get the most expensive free lunch in American history
If a museum in the next superpower nation ever commemorates the decline of the last great superpower, it will make the two-and-a-half page bill introduced this week the center of the display.
Just as they do today at the National Archives’ Declaration of Independence exhibit, tourists in the future–perhaps in Beijing, perhaps somewhere else–will line up to see a framed draft of this week’s White House legislation demanding Congress surrender its power of the purse, and give an unelected appointee–in this case, Treasury Secretary Henry Paulson–the power to hand over $700 billion of taxpayer money to “any financial institution,” “without limitation…on such terms and conditions as determined by [him].” In a nation priding itself on separating powers between the branches of government, the bill explicitly states that decisions by Paulson may not even “be reviewed by any court of law or any administrative agency.”
Whether the bill passes or not, the drafting of it–even the mere thinking of it–is the single most clear sign that all of the major tenets of American democracy are on the auction block these days: from constitutional checks and balances, to legislative and judicial oversight to electoral accountability itself.
In the immediate aftermath of what could be the starting gun of a second Great Depression, the public this week will face a wave of propaganda from Washington. Using the same playbook that succeeded in passing the Patriot Act and the Iraq War authorization with almost no questions, politicians will inevitably invoke love of country, fear, loathing and red-alert emergency–all designed to ram this bill into law as fast as possible, with as little scrutiny as possible. Put in book terms, we will see Thomas Frank’s wrecking crew using Naomi Klein’s shock doctrine to justify a bigger free lunch than David Cay Johnston ever imagined.
Here are five key questions we should all be asking:
1) What will prevent the bill from allowing both parties to use the guise of purchasing worthless mortgages to further enrich their largest campaign donors?
Other than a top-line limit of $700 billion, the White House proposal includes not a single reference to how much taxpayers can be forced to pay private investment firms for their worthless mortgages. To the untrained eye, the omission may seem like a minor oversight, but it is almost certainly deliberate not just as a power grab, but in its potential to convert the Treasury Department into a Tammany Hall graft machine with international reach.
Paulson came directly to government from Goldman Sachs, and with these new powers, he could posture as the 21st century’s Boss Tweed, completely free to pay inflated prices for those mortgages as a means of financially rewarding his former Wall Street colleagues who created this mess. And in his initial round of interviews this weekend, he made barely any effort to stem concerns that this is precisely his plan of action. When asked how he would “decide what to buy and what to pay,” he stumbled through an evasive answer, saying “Well, we’re going to have some professional asset managers and some real experts working with us, and we’ll use a – you know, we’re working through the processes.”
Sure, he would have to report semiannually to a presumably Democratic Congress. But that offers almost no safeguard either, as Democrats are just as awash as Republicans in campaign contributions from the companies that would benefit from government overbuying.
Since the deregulatory splurge of the 1990s began, the financial industry has donated almost $600 million to both parties–splitting their donations almost 50-50. That includes an astounding $9.8 million to Democratic presidential nominee Barack Obama, and $6.8 million to Republican nominee John McCain. On top of that is another $500 million dollars in lobbying expenditures in the last decade.
Thanks to the proposal’s omissions, those expenditures could generate a $700 billion return on worthless mortgage investments–well above the 100-to-1 ratio of return on investment that lobbying expenditures typically reap corporate clients in Washington. Alas, in the Halliburton age, such government-corporate profiteering would be anything but rare.
2) How are Americans and investors supposed to feel confident that the crisis will be solved, if the very people who engineered the crisis are being relied on to solve it?
McCain and Obama are campaigning hard on the concept of “change,” and both are playing that message off the Wall Street meltdown. Yet, in brandishing their “change” credentials on economic issues, both are relying on the same cadre of Wall Street and Washington insiders who engineered today’s crisis.
According to Mother Jones, McCain’s campaign is run by at least 83 staffers who have recently lobbied for the financial industry. Their clients included AIG, Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, and Citigroup, i.e.. all the major corporations that caused the financial implosion, and who stand to gain from the bailout.
Likewise, McCain’s economic guru is Phil “nation of whiners” Gramm. He is the vice-chairman of the investment bank UBS, which according to the Politico.com wrote down “more than $18 billion in exposure to subprime loans and other risky securities and is considering cutting as many as 8,000 jobs.” As a Texas senator, Gramm spearheaded Congress’s radical deregulatory agenda in the 1990s, including authoring the bill repealing the Glass-Steagall Act (i.e., the Depression-era law preventing consolidation that many experts say could have prevented, or at least softened, the current emergency).
Obama, meanwhile, has long relied on Gramm’s boss, UBS chairman Robert Wolf, as one of his top economic advisers and fundraisers. Worse, during his emergency meeting to discuss the crisis last week, five of the nine people he said would be directing his response have played a role in the crisis they claim expertise in fixing. They are:
** Former Clinton Treasury Secretaries Robert Rubin (now an executive at Citigroup, which is embroiled in the meltdown) and Lawrence Summers, who the Politico notes both “supported and helped negotiate the bill [repealing Glass-Steagall].”
** William Daley, the Clinton administration architect of corporate-friendly trade pacts like NAFTA and now a top official at J.P. Morgan Chase.
** Gene Sperling, the top economic adviser in the Clinton White House that deregulated Wall Street.
** Paul O’Neill, the former Bush Treasury Secretary, who despite occasionally criticizing the White House, is a lockstep conservative on economics.
Other than Joseph Stiglitz, Obama included not a single progressive, nor even one of the many visionaries like economist Dean Baker, who has for years been predicting exactly this kind of meltdown. Indeed, the one major labor-affiliated economist officially affiliated with his campaign, Jared Bernstein, “was not part of the crisis meeting,” according to the Washington Post.
Just as the media establishment still grants more credibility to humiliated Iraq war proponents than the original–and now vindicated–war critics, both party standard-bearers are telling Americans that the best people to solve the economic conundrum are those who had a hand in creating it. How, exactly, should this fox-in-the-henhouse situation inspire any confidence in Americans or investors that our political leaders are serious about fixing the problem?
3) How is this meltdown a failure of “oversight” if it has almost nothing to do with illegality?
Most politicians and pundits are bewailing the lack of “oversight” that allegedly led us to the brink of disaster. The rhetoric suggests that the real perpetrators were negligent regulators failing to enforce–or “overseeing”–existing laws. And while there’s certainly a bit of that, CBS’s Bob Schieffer said it best when he reported that, “This is not the work of those who broke the law, it is the work of those operating within the law–those who pushed the law to the limit, making loans the law allowed but common sense dictated should not have been made.”
Substituting a debate about “oversight” for a debate about regulation isn’t merely a semantic error, nor a harmless accident. It allows incumbents to avoid culpability for their votes that gutted existing regulations and helps challenger candidates make a deceptive argument claiming the only change necessary is the specific officeholder, not the system of free-market fundamentalism itself. They get to make a self-servingly partisan case while eschewing the wrath of their regulation-averse business donors.
Crushed, of course, is the potential election mandate. Candidates elected on pledges to beef up “oversight” have only to staff agencies with new faces to fulfill their campaign promises, rather than doing the hard work of passing much-needed new laws.
4) When did a crisis suddenly mean that giving away taxpayer cash to campaign donors is laudably apolitical, but spending taxpayer money on taxpayers is inappropriately “political?”
During initial meetings with Congress about the bailout, Treasury Secretary Henry Paulson rejected “calls to include tighter regulations, corporate reforms or limits on executive compensation as part of the measure,” according to the Associated Press. He also stated his opposition to using a fraction of the money to help homeowners struggling with their bills, shore up the social safety net, or stimulate job growth through public infrastructure spending.
Almost universally, his position was praised by lawmakers and reporters as a judicious and apolitical one worthy of bipartisan praise. At the same time, demands to make sure taxpayers get something for their money were labeled unacceptably “political,” divisive and extraneous.
“What you heard last evening is one of those rare moments, certainly rare in my experience here, is Democrats and Republicans deciding we need to work together quickly,” Banking Committee Chairman Chris Dodd gushed to the New York Times after meeting with Paulson.
Fox News Sunday anchor Chris Wallace praised the White House proposal as “clean” and berated those who he said were trying to “Christmas tree” the bill with relief for homeowners, prompting Sen. John Kyl (R-Ariz.) to enthusiastically agree.
“There is a crisis in our country,” Kyl said. “We’ve got to come together as House and Senate, Democrat and Republican, and deal with this crisis as Americans, for the American people, and not try to bring on all of our political agendas.”
Senate Minority Leader Mitch McConnell (R-Ky.) echoed the sentiment, telling Politico.com that he does not want the bailout to become a vehicle for other “partisan plans and pet projects.”
This framing comes directly from the financial industry itself. The Wall Street Journal reports that congressional leaders are already meeting with lobbyists from the nation’s largest banks, securities firms and insurers “whose message to lawmakers was clear: Don’t load the legislation up with provisions not directly related to the crisis, or regulatory measures the industry has long opposed.”
So, handing over $700 billion of taxpayer money to Wall Street speculators with no conditions whatsoever is now so supposedly apolitical that reporters and politicians take offense at any suggestion otherwise. Meanwhile, proposing to better regulate Wall Street or help ordinary citizens in exchange for that bailout is an unacceptably partisan “political agenda” inappropriate at a time of “crisis in our country”–as if the wage, housing, and health care crisis afflicting workers, homeowners and families is far less critical to the national welfare than the crisis hitting millionaire speculators.
5) How are we going to pay for this?
In the Bush age of unending deficits, even considering affordability strikes some as silly and old fashioned. But we’re talking about adding $700 billion to the national debt–or $2,000 for every man, woman and child in America. Moreover, if, as bailout proponents say, the ultimate goal of a bank rescue is to keep the credit markets liquid and interest rates under control, then adding $700 billion to the interest-rate-exacerbating national debt seems an odd economic analgesic, to say the least. This is to say nothing about the insanity of responding to what is inherently a debt crisis by simply firing up the national credit card and incurring more debt.
To date, Sen. Bernie Sanders (I-Vt.) is the only lawmaker who has laid out a specific plan to both re-regulate the financial markets and responsibly finance a bailout. He proposes to impose a 10 percent surtax on those making over $500,000 a year, raising roughly $300 billion. “The people who can best afford to pay and the people who have benefited most from Bush’s economic policies are the people who should provide the funds for the bailout,” he said.
How that fiscal conservatism is met on Capitol Hill will expose the real motives–and interests–behind the bailout package.
David Sirota, an In These Times senior editor and syndicated columnist, is a staff writer at PandoDaily and a bestselling author whose book Back to Our Future: How the 1980s Explain the World We Live In Now—Our Culture, Our Politics, Our Everything was released in 2011. Sirota, whose previous books include The Uprising and Hostile Takeover, co-hosts "The Rundown" on AM630 KHOW in Colorado. E-mail him at email@example.com, follow him on Twitter @davidsirota or visit his website at www.davidsirota.com.