The Guardian Unlimited, September 29, 2008
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Most authors of books on politics or economics are happy when they get one or two prominent members of Congress to endorse their work. It looks like I’m about to get majorities of both chambers to endorse my book, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (free download available). There is no other way to describe Henry Paulson’s $700 billion bailout deal.
The point of my book is that the battle between progressives and conservatives is not about a policy of government intervention as opposed to free market policies. Rather, it is a battle between those who want to use the government to benefit the middle and bottom of the income distribution and those who want to use the power of government to redistribute income upwards.
Congressional support for the bailout was a big victory for those who want to redistribute income upward. The bailout is about taking money from the school teachers and cab drivers and giving it to incredibly rich Wall Street bankers, who are so incompetent that they drove their banks into the ground.
This upward redistribution was done under the cover of crisis, just like the war in Iraq. But there is no serious crisis story. Yes the economy is in a recession that is getting worse, but the bailout will not get us out of the recession, or even be much help in alleviating it.
The best argument that the bailout proponents had was that the failure to do the bailout could lead to a collapse of the financial system, leaving us unable to use credit cards or ATMs, or otherwise conduct normal financial transactions. This would indeed be scary, since it would imply a complete economic collapse. (I had actually accepted this line.)
However, on more careful thought, this is an idle threat. In the event the banking system really did freeze up, then the Fed would step in and take over the major banks. (It had contingency plans for such a takeover in the 80s, when the money center banks were saddled with billions of dollars of bad developing country debt.)
The banks would not be happy about a Fed takeover. The top executives would be out of a job, and the shareholders would likely lose their full investment. However, the rest of us would be able to carry on with our lives as we did before. After maybe a few hours of disruption, we would be able to cash checks and use credit cards and ATMs just as we did before the crisis.
In effect, the big banks had a gun pointed at their heads. The banks told Congress that if they didn’t get $700 billion, then they would pull the trigger. Given this choice, Congress coughed up the cash.
While the final version is an improvement over the original request, there is little by way of hard commitments on the key points. Which executives will see their pay limited and by how much? How much equity does the government get for buying the banks’ bad debts? How many mortgages will be renegotiated? If this were a serious bill, there would be specific wording on these points.
Henry Paulson did not sign a contract when he was CEO with Goldman Sachs that gave him “fair compensation.” He signed a contract that specified that he would get tens of millions of dollars in salary and bonuses. Similarly, when Warren Buffet invested $5 billion in Goldman, he got a 10 percent stake in the bank, not a generic promise of “equity.” That is the way business is usually done when people are serious.
The bill also does not change the bankruptcy rules to allow people to stay in their home. Nor does it provide for any real stimulus. Undoubtedly the spending on the bailout will be used in future months as an argument against real stimulus.
Wall Street may have won this one, but this is the battle not the war. The whole country now knows that these millionaire and billionaire high-flyers are the biggest bunch of welfare cheats around. The folks with the yachts, private jets, and personal servants lack the skills and diligence to make it on their own. They need the tax dollars from the rest of us to make ends meet.
Every progressive in the country should be working to ensure that this bailout is incredibly costly for the Wall Street crew. They should wish that they never took our money.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues.