Blog

Les Leopold

 By Les Leopold
Author, “The Looting of America”

The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal. (Berkshire Hathaway annual report, 2002)

Those were some wise words from Warren Buffett, the Will Rogers of the financial world. He used to say such things at his stockholder meetings, where tens of thousands come to savor his homilies and celebrate their own good fortune–a kind of Woodstock for people who dig money more than sex, drugs and rock n roll. His fans love to party with the iconic multi-billionaire from Omaha with the sparkle in his eyes. The guy makes people feel proud to be Americans and capitalists, big and small.

Buffett’s reputation is as a straight shooter. For years he had only contempt for fantasy finance securities that contain nothing but air and risk. He was among the first to see that if we let toxic securities like synthetic collateralized debt obligations run wild, we’d soon be engulfed in a financial crisis. (For an easy to read account of these “financial weapons of mass destruction” please see The Looting of America.)

But times have changed. Today, Buffett is all about the bottom line. He’s taken to defending the biggest shysters in the country–and argues that his own questionable derivatives should be shielded from government regulators.

If this were just about Warren Buffett, it wouldn’t be worth giving him more ink. But his betrayal comes at a time when Congress is finally realizing that most of us are truly upset with Wall Street’s looting of America. While big bank profits and bonuses are reaching record highs, April’s unemployment statistics show that there are over 29 million of us without work or forced into part-time jobs. The BLS U6 jobless rate is at 17.1 percent.

There’s a genuine populist upsurge that might force the Senate to pass legislation that would bust up the largest banks, reintroduce Glass-Steagall, control dangerous derivatives and provide consumer financial protection. Buffett has decided instead to lend his credibility to defend Wall Street against Main Street. (Hey Warren, how about that high speed trading that tore the stock market apart yesterday. Are you for that too?)

Apparently something happened on the way to the bank–or actually, on the way to the bank bailout. Good old Mr. Buffett is no dummy. When he saw the Goldman Sachs alumni and groupies in government (like Henry Paulson at Treasury and Tim Geithner at the Fed) shoveling billions (not millions) of taxpayer dollars into Goldman, one of the richest financial institutions in history, he knew where next to put his own money. (Bob Kuttner’s Presidency in Peril provides a virtual yearbook of Goldman Sachs graduates now in top government posts.)

The government, led by Paulson, the former Goldman Sachs CEO, pumped $10 billion of TARP money into Goldman Sachs at 5 percent interest. But the oracle of Omaha, put in $5 billion and got 10 percent interest plus extra goodies if the stock price rose. Now that’s a smart businessman.

Mr. Buffett also knew that Goldman Sachs would probably snag lots more ($12.9 billion, in fact) in bailout funds via AIG, which had insured billions of Goldman’s toxic assets–including a bristling arsenal of financial weapons of mass destruction. Goldman Sachs was going to get a free ride on two colossal bad bets. One bet was on complex derivatives that turned bad and festered on its balance sheet. It had been a big gamble for Goldman to hold those assets, but the returns (while they lasted) and the upfront fees were just too juicy to resist. Goldman’s second big bet was that AIG was sound enough to insure those risky derivatives against default. Wrong again. Had AIG gone into bankruptcy, Goldman Sachs would have received pennies on the dollar for their bad bets. Hey, that’s capitalism, isn’t it? Well, maybe once upon a time.

Fortunately for Goldman, their old colleagues who were now in control of the government purse strings decided that AIG was way too big to fail. So we bailed them out to the tune of about $180 billion. But the Goldman Sachs alumni went one step further. They allowed AIG to pay off its debts in full to Goldman Sachs: $12.9 billion went straight to the company’s bottom line and bonus pool. And pass those interest payments over to Mr. Buffett! If the journalists around Buffett weren’t so awestruck by his wealth and rock star status they might’ve asked him: Is this capitalism too?

So here’s Mr. Buffett holding a big fat slice of Goldman Sachs, and now the SEC comes busting in, accusing the bank of fraud. Goldman Sachs is charged with loading up investors with a package of financial transactions called Abacus that it knew amounted to toxic junk–thus enabling a hedge fund friend, John Paulson (no relation to Henry), to make a billion by betting against the Abacus deal. What kind of toxic junk are we talking about? The very same synthetic collateralized debt obligations that Buffett once called “financial weapons of mass destruction.” Mr. Buffett, Berkshire Hathaway and its delirious stockholders are now the proud owners of said weapons.

So what does Mr. Buffett do? The plain speaking dude from the Great Plains takes a stand–in defense of Goldman Sachs and its CEO Lloyd Blankfein. Then he steps smack into the financial cow pie by endorsing the Abacus financial weapons of mass destruction.

“I don’t have a problem with the Abacus transaction at all, and I think I understand it better than most.”

You betcha. Those darn critters are really kind of cute–when they’re paying off big time for Berkshire Hathaway.

Buffett didn’t stop there. He’s lobbying hard on Capitol Hill to protect his own special derivatives, which he developed just before the crash. The financial reform Congress is considering would require companies like Berkshire to set aside large sums to cover potential losses on their risky investments. But if Buffett gets his way, the legislation will include a provision to “largely exempt existing derivatives contracts from the proposed rules,” reports the Wall Street Journal. “The change thus would aid Berkshire, which has a $63 billion derivatives portfolio, according to Barclays Capital.”

In other words, Mr. Buffett is following in the footsteps of AIG, which made hundreds of billions of bets without posting collateral. But what the heck, Warren is as good as gold, isn’t he?

Since Buffett says he understands these shady financial products “better than most,” maybe he can explain to us what economic value his special derivatives added to our economy. I can hear echoes of Claude Raines in Casablanca: “I’m shocked, shocked to find that gambling is going on in here!” It sure is and Mr. Buffett is now making himself quite at home at the poker tables. It seems casino capitalism is fine with him after all, even if it’s a criminal scam.

I hope Buffett’s fans realize that their dividends and capital gains are partly derived from taxpayer bailouts and from those financial weapons of mass destruction Buffett used to denounce. You know, the ones that blew up the global economy and put tens of millions of Americans out of work?

Maybe it’s time to hold our billionaires to account, even the nice ones.

***

Les Leopold is the author of The Looting of America: How Wall Street’s Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009.

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

Last week, when President Obama was asked about the $9 million bonus for Goldman Sachs CEO Lloyd Blankfein, he described Blankfein as a savvy businessman, adding that Americans don’t begrudge people being rewarded for success. While the White House later qualified Obama’s comment about Blankfein and his fellow bank executives, it’s worth examining more closely some of the ways in which Blankfein and the Goldman gang were “savvy.”

Perhaps the Goldman gang’s best claim to savvy was in buying up hundreds of billions of dollars of mortgages and packaging them into mortgage backed securities, and more complex derivative instruments, and selling them all over the world. Blankfein and Goldman earned tens of billions of dollars on these deals. The great trick was that many of the loans put into these securities were issued by banks filling in phony information so that borrowers could get loans that they would not be able to repay. But this was not Goldman’s concern. They made money on the packaging and the selling of the securities.

In fact, Goldman actually recognized that many of these loans would go bad. So they went to the insurance giant AIG and got them to issue credit default swaps against many of the securities it had created. In effect they were betting that their own securities were garbage. Now that is savvy. (It says something else about the highly paid executives at AIG.)

Goldman doesn’t just confine its savvy to the US economy; it shares it with the rest of the world as well. According to the New York Times it worked closely with the Greek government over the last decade to help it conceal its budget deficit. The trick was to construct complex financial arrangements that appeared on the books as “swaps,” even though they were in fact loans. Greece was adding billions of dollars to its debt, and thanks to the ingenuity of the Goldman crew, no one knew about it until now.

But Goldman’s greatest triumph was to get the government to come to its rescue when the financial sector was melting down in the fall of 2008 as the housing bubble that they had helped to fuel began to collapse. The treasury secretary and former Goldman CEO Henry Paulson rushed to Congress and demanded $700 billion for the banks, no questions asked. He dragged along Federal Reserve Board chairman Ben Bernanke for support, along with Timothy Geithner, then the important head of the New York Federal Reserve Bank and now President Obama’s treasury secretary.

This triumvirate somehow managed to convince Congress that we would have a second Great Depression if it didn’t cough up the money immediately with no conditions. At that point Goldman, Morgan Stanley, Citigroup, and most of the other major banks were staring at bankruptcy. While this cascade of bank failures would have been bad news for the economy, there was no plausible scenario in which it would have led to a second Great Depression.

There was also no reason that Congress could not have put conditions on its money. For example, Congress could have dictated that as a condition of getting the money that bankers would get the same sort of paychecks as other workers, that they would get out of highly speculative activity, that the largest banks would be downsized and that the principle would be written down on bad mortgages. At that point, Congress could have told the bank honchos that they had to run around Wall Street naked with their underpants on their head. The bankers had no choice; their banks would crash and burn without government support.

But the savvy Mr. Blankfein and the other bankers got the money no questions asked. In fact, Goldman even got the government to pick up the bankrupt AIG’s debts. Thanks to the government’s intervention, Goldman got paid every penny on its bets with AIG. This came to $13 billion, enough money to pay for 4 million kid-years of health care under the Children’s Health Insurance Program.

No one should doubt that Blankfein is a very savvy banker. Without his ingenuity Goldman Sachs would likely be out of business, its component divisions being auctioned off to the highest bidder. Instead it is making record profits and paying out record bonuses.

But unlike the successful ballplayers to whom President Obama compared Blankfein, Goldman’s success is inherently parasitic. It comes at the expense of taxpayers and the productive economy. President Obama must decide whether he stands with the Wall Street banks or whether he stands with the workers and businesses who actually produce wealth.

            ***

Dean Baker is author of the new book, “Plunder and Blunder: The Rise and Fall of the Bubble Economy,” PoliPoint Press, LLC. This piece was first published in The Guardian and on  Huffington Post.

Robert Kuttner

Robert Kuttner
Co-Founder and Co-Editor of The American Prospect

Dear David,

President Obama faces two huge challenges in the next few months. One is dealing with the reality of an impending depression. It will take much stronger medicine to avert a depression than the measures taken to date, and the president needs to rally public opinion if he is to persuade Congress to act at the necessary scale.

The related challenge is about appearances — about whether middle America feels that the federal outlays are trickling down to regular people. So far, bankers seem to be getting too much and Main Street too little.

The two challenges are related. If the solutions are not bolder, they won’t cure the crisis. If the public isn’t persuaded of the need, Congress won’t act. If the economy keeps sinking, the people will lose confidence in the president’s leadership.

And if President Obama doesn’t boldly address both challenges, his presidency is in trouble. I take heart from some of the subtle shifts in the president’s positioning in recent weeks, but he needs to go farther, and move faster.

At the core of both problems is the sinking economy and the fact that he hired a team of orthodox economic advisers to fix it. A radical crisis requires radical solutions, but the economic team has been far behind the curve in the remedies it has put forward, both in the reality and the optics.

The Reality:

To prevent a slide into depression, you will need to spend roughly another three trillion dollars of public money in order to pay for a second stimulus package (at least a trillion) and to recapitalize the banking system (as much as two trillion.) Neither Congress nor public opinion is remotely prepared for that action yet. No one but the president is capable of the kind leadership necessary to move public opinion in this direction, and Barack Obama is a better teacher than most presidents. But that money needs to be understood as practical help for ordinary American families, not as more bailout for the culprits who created the mess.

Faced with three trillion dollars in additional needs, the administration has only $350 billion at its disposal — the as yet unspent TARP funds. Right now, the administration seems to be trying to spend that money several times over — first as an equity guarantee to anchor more borrowing from the Federal Reserve as the core of Tim Geithner’s latest bank rescue; then as a source of public funds for the auto restructuring; and again as part of the plan to refinance mortgages and prevent foreclosures. This string is more than played out. There are limits, financially and politically, to the use of the Fed as all-purpose piggy-bank. At some point very soon, Congress needs to be brought back in, because your efforts require both Congressional support and a lot more real money. And Congress will only act if the people understand the stakes.

The political reality is that the economy needs to be on the mend by mid-2010, or the Democrats will lose seats in the mid-term election. But most informed observers think that if present trends continue, the economy will not be in recovery by Election Day 2010. If the Republicans eat into what is now a bare working Congressional majority, you will face legislative gridlock. And the perception of a weakened presidency will become a reality — portending even worse political news for the president’s re-election in 2012.

Right now, the president has enlisted some Republican governors like Charlie Crist urging diehard GOP legislators to back his program. That’s a trifecta. It splits the opposition party, reinforces the perception of Republican obstructionism in Congress, and vindicates the president’s bipartisan overtures. Well done! But this will last only as long as President Obama’s program seems to be working.

As you must know, President Obama is at grave risk of getting on the wrong side of a populist backlash, which the Republicans — however improbably — will exploit. Regular Americans are losing savings, incomes and jobs, and see vast sums from bank rescues going mainly to bankers. A USA Today/Gallup poll published Monday shows that 83% of Americans favor federal aid to create jobs, 67% favor aid to states in financial trouble, and 64% favor relief to homeowners facing foreclosure. But only 39% favor aid to banks. I recently gave a speech to a blue collar audience, and one questioner asked why they didn’t just mail a check for $100,000 to every American family instead. Far fetched as that sounds, the seven trillion dollar cost about equals the direct and indirect costs of the serial bank bailouts (counting advances and guarantees from the Fed.) In days ahead, you will be hearing more of this on talk radio and cable TV.

You already grasp the need for better symbolism on this front. The limit on executive pay for top bankers getting federal relief is a good start. But the public expects a lot more. In the public mind, the bank bailout is conflated with the stimulus package; and what gets the publicity is the fact that the relief is going mostly to bankers, bank shareholders, and bondholders.

It did not help that Tim Geithner went on stage before his plan was ready for prime time. The plan laid an egg on Wall Street, but the financial market is not the only audience that matters. Geithner’s approach is also increasingly unpopular with ordinary people and with commentators. The fact that Geithner’s latest housing rescue also channels the relief through banks and bondholders, and solves only a fraction of the foreclosure crisis, does not help either.

The week that the 2008 election campaign locked in your favor, was, in retrospect, a very close call. That was the week of September 29, after candidate Obama had announced that even though the bank bailout bill was not perfect, he would support it. A large majority of House Republicans, meanwhile, refused to support the bill. Their mail and phone calls were running a hundred to one against the measure.

As you will recall, John McCain clumsily announced the suspension of his campaign and dramatically returned to the Senate, where he played no useful role whatever. When the dust settled, the White House rounded up just enough Republican votes over rank and file GOP opposition, and Barack Obama looked like a statesman while McCain looked like an inept opportunist. But had McCain behaved as a more adroit demagogue and played to the latent populism in the backlash against the bill, he could have been the net beneficiary while painting Obama as the “elite” agent of the banks. Given the close Republican alliance with Wall Street and McCain’s own prior record, the claim would have been preposterous, but politically it might have worked.

There will continue to be this sort of risk going forward. Republicans will posture as pseudo-populists. The administration’s emergency measures both need to cure the economic collapse — and to do so by symbolically and palpably siding with regular people.

With all of these alarms, there is still a lot that I find encouraging about the president’s actions in recent weeks.

President Obama’s event January 31 launching the task force on middle class working families chaired by Vice President Biden was superb, and the president’s remarks were spot on. Among other things, he declared:

We know that you cannot have a strong middle class without a strong labor movement. We know that strong, vibrant, growing unions can exist side by side with strong, vibrant and growing businesses. This isn’t a either/or proposition between the interests of workers and the interests of shareholders. That’s the old argument. The new argument is that the American economy is not and has never been a zero-sum game. When workers are prospering, they buy products that make businesses prosper. We can be competitive and lean and mean and still create a situation where workers are thriving in this country.

We have not heard language like that in the Oval Office since Franklin Roosevelt. And the Employee Free Choice Act, if enacted, would not just create a stronger labor movement but a stronger constituency for the Obama administration and future progressive electoral majorities. It puts the president on the side of working Americans.

I noted with great interest a most unusual front-page piece in the New York Times February 10, headlined, “Geithner Said to Have Prevailed on the Bailout.” In this piece, you and unnamed officials were quoted to the effect that Geithner had won the argument inside the administration against more severe executive pay limits and other tough conditions on banks receiving additional government aid.

What made this piece so interesting is that it deliberately publicized a split in a team famous for self-discipline and for never leaking anything about internal disputes. A blunter translation of the leak might be “You won that one and good luck, Tim, this baby is all yours.” I certainly hope that’s what you meant, because the baby is something of an orphan that nobody wants to claim. And if Geithner is not doing the job in a way that protects the public interest and the president, he certainly deserves to be isolated. Unless he improves on his performance to date, I would not be surprised if in six months, Geithner “decided” to resign to spend more time with his family.

It will be interesting to see whether the center-right economic team who took senior posts in the campaign and then got the top jobs in the administration learns how to get with a bolder program. If they don’t, it is up to the political team to re-educate them or to find people who get it right. I certainly hope you and the president are also talking to people who have a more radical view of how to fix the banking system, like Joe Stiglitz, Nouriel Roubini, Dean Baker, James Galbraith and Paul Krugman. The fact that people like Alan Greenspan and Sen. Lindsey Graham have said that bank nationalization might be necessary certainly gives the president some cover.

In early February, the president’s economic advisers came up with the idea of a White House summit on fiscal responsibility, which was held this Monday, February 23. The idea was to reassure fiscally conservative Blue Dogs and lay the groundwork for a “grand bargain” long promoted by Robert Rubin, Pete Peterson, and some in Congress to pay for the sins of emergency deficit spending this year and next by cutting back on Social Security and Medicare down the road. The preferred vehicle to bring this about was a bipartisan commission modeled on the base-closing commission. It would come up with a plan for automatic triggers for cutbacks in social insurance, and would be subject only to an up or down Congressional vote.

But someone failed to run the political traps. There was plenty of consultation with the Blue Dog Democrats and with some senior Republicans, but nobody thought to tell Nancy Pelosi or Harry Reid. Senior Congressional Democrats, among them Senate Finance Committee Chairman Max Baucus, who is nobody’s idea of a fiscal wastrel, warned the president that this was no time to be cutting back on Social Security and Medicare or putting government on bipartisan automatic pilot.

To his credit, the president changed the character of the White House summit, and preempted it with a budget briefing for reporters on the administration’s commitment to being the deficit back below three percent of GDP by 2013 — by letting the Bush tax cuts expire and by finding other revenue — not by gutting social insurance. Despite a lot of rhetoric about bipartisanship, the idea of a commission is off the table. Congratulations on preventing what might have been a political debacle and seizing the fiscal high ground.

It has been a real pleasure to see President Obama get out of the Washington bubble and get back on the road. His speech in Springfield, where the campaign began, marking the two-hundredth anniversary of President Lincoln’s birth, was one of his finest. And he articulated the themes that must be persuasive to Americans if he is to save the economy and his presidency.

In that speech, he challenged “the philosophy that says every problem can be solved if only government would step out of the way; that if government were just dismantled, divvied up into tax breaks, and handed out to the wealthiest among us, it would somehow benefit us all.”

And he added:

“Such knee-jerk disdain for government – this constant rejection of any common endeavor — cannot rebuild our levees or our roads or our bridges. It cannot refurbish our schools or modernize our health care system; lead to the next medical discovery or yield the research and technology that will spark a clean energy economy.

“Only a nation can do these things. Only by coming together, all of us, and expressing that sense of shared sacrifice and responsibility — for ourselves and one another — can we do the work that must be done in this country. That is the very definition of being American.”

I hope we hear a lot more of this.

Before the economy moves toward recovery, we will need a very different strategy for reviving a functioning banking sector — one rebuilds a simplified financial system to serve the real economy. The current approach is more about saving existing zombie banks, and the people notice. You can call it receivership or nationalization, but sooner or later the president will have to embrace it, and it is better done sooner.

We also need a plan to prevent foreclosures that goes directly to help homeowners, rather than hoping that by giving more incentives to banks and bondholders we can somehow induce them into passing along some relief — a plan that helps homeowners directly. I think the political team gets that. Either the economic team needs to get it, or you need to get a different economic team.

There is the further challenge of branding the practical help that the Obama administration is already providing. Franklin Roosevelt had the blue eagle of the NRA plastered in every store window. And when jobs came via the CCC or the WPA, nobody doubted who was the author of that help. For now, even though $780 billion is a lot of money, it passes through so many hands before it finally reaches local communities that it isn’t branded as help from President Obama. You are probably better equipped to figure out that one than I am, but it is another challenge.

In closing, let me say that during the campaign I wrote a lot of commentary, sometimes back-seat-driving what you were doing. Nine times out of ten when I second guessed your tactics, you were already several steps ahead of me. You’re a stellar political strategist. However, you now have the added challenge of governing, and of governing on the edge of a depression with a team of economic advisers that is sometimes more of an echo of the past than an asset. You don’t have much margin of error, and you need to get the politics right in order to get the economics right. We all need you and President Obama to succeed.

David Sirota

By David Sirota
Author of “The Uprising: An Unauthorized Tour of the Populist Revolt”

History’s great American parables teach that if anything unified our founders, it was a deep antipathy to dictatorship. As bourgeois revolutionaries from Boston to Philadelphia courageously split with the British crown in 1776, they created three equal branches of government to prevent, in the words of James Madison, “a tyrannical concentration of all the powers” in a president’s hands.

For two centuries since, civics books, Hollywood biopics and party convention speeches have constructed a mythology insisting that this democratic commitment to checks and balances makes our country a beacon of freedom – the “shining city on a hill” overlooking a despotic world below. We are told that democracy’s tumult – its messy debates, legislative sausage-making and electoral friction – is the best way to guarantee that public policy represents public will, therefore making us a strong and durable nation.

If that is true, then every patriot should be concerned about the intensifying efforts to supplant democracy with something far more authoritarian. Call it American czarism.

That term should be as impossibly oxymoronic as crash landings and deafening silence, considering our Constitution’s desire to create a “government of laws and not of men,” as John Adams said. But politics is filled with paradoxes from Reagan Democrats to Obama Republicans, and czars – i.e., policymakers granted extralegal, cross-agency powers – have become increasingly prevalent in our government over the past century.

After the Great Flood of 1927, for instance, President Calvin Coolidge named Herbert Hoover the federal government czar overseeing relief efforts, and Hoover subsequently appointed “dictators” (he actually used that term) to help coordinate the response.

During the power consolidations of the New Deal in the 1930s, a Time magazine story headlined “Dictator or Democrat” reported on the “suspicions of those throughout the nation who have an uneasy feeling that Roosevelt, under cover of the emergency, is trying ‘to slip something over’ on democracy.” In the 1940s and 1950s, parks commissioner Robert Moses – famously known as “the power broker” – amassed so much personal authority that he was able to almost single-handedly redesign New York City. And lately, presidents have given us poverty, energy, drug, health and even Iraq war czars.

Until now, this slow lurch toward czarism has primarily reflected the ancient, almost innate human desire for power and paternalistic leadership. The current president reminded us that executives see all-powerful “deciders” when they look in the mirror. And Americans – sans kings to rally around – have been elevating commanders in chief to superhero status well before Barack Obama’s Marvel comic-book debut and George Bush’s flight-suited “Top Gun” impression in 2003.

In recent years, this culture of “presidentialism,” as Vanderbilt Professor Dana Nelson calls it, has justified the Patriot Act, warrantless wiretaps and a radical theory of the “unitary executive” that aims to provide a jurisprudential rationale for total White House supremacy over all government. But only in the past three months has American czarism metastasized from a troubling slow-growth tumor to a potentially deadly cancer.

In October, Congress relinquished its most basic oversight powers and gave Treasury Secretary Henry Paulson sole authority to dole out billions of bailout dollars to Wall Street. At the same time, it did nothing when Federal Reserve chairman Ben Bernanke used fiats to commit “$5 trillion worth of new money, loan guarantees and loosened lending requirements,” according to Politico – all while he refused to tell the public who is receiving the largesse.

And the Washington Post has reported that lawmakers may appoint a “car czar” who “would essentially control the purse strings” of an auto industry bailout and “could force Detroit’s Big Three automakers into bankruptcy” if he or she didn’t like their behavior.

Put bluntly, the unprecedented usurpation of spending power by the executive branch and the Federal Reserve is systematically undermining our democracy’s most sacrosanct principle – the one that is supposed to ensure “the legislative department alone has access to the pockets of the people,” as Madison said. And this new czarism is so strident because it reflects both executive power lust and the 21st century economy.

Today, keystrokes and mouse-clicks instantly whisk trillions of dollars across the planet, and many of those keystrokes and mouse-clicks are uninhibited by the grindingly slow processes of democracy.

Saudi princes don’t have to publish announcements in a federal register before moving cash from sovereign wealth funds into foreign investments. China’s rulers aren’t obligated to obtain legislative approval when buying or dumping U.S. Treasury bills; and transnational corporations will not wait for public hearings before shuttering offices, eliminating jobs and cutting off credit.

Our nation is integrally connected to this fast-moving globalized economy, and American czarism effectively posits that in order to compete, we must anoint strongmen as saviors, prioritize speed instead of sobriety and emulate dictatorship instead of democracy.

Indeed, the Economist magazine’s prediction that the “economic crisis may increase the attractiveness of the Chinese model of authoritarian capitalism” is coming true right here at home, as we seem ever more intent on replicating – rather than resisting – that model.

This, as much as personal hubris, explains why Paulson and Bernanke sought unprecedented latitude in spending trillions – they want to be able to move as fast as their autocratic counterparts in other countries, and believe congressional oversight will slow them down.

It explains why UC Berkeley economist Laura Tyson says we need an auto czar who will “take a number of approaches to this problem that are already known, that have been discussed endlessly, and force it through” – because to economists, a czar quickly “forcing it through” is more important than any consideration for democratic deliberation.

And it explains why when Obama aides this week demanded complete control over the second half of the Wall Street bailout funds, House Financial Services Committee chairman Rep. Barney Frank, D- Mass., shirked his oversight duties and said he’s “willing to accept their word” that they will spend the money responsibly. In a czarism, that’s what legislators do: “accept the word” of the czar.

In sum, it explains why the age-old struggle between capitalism and democracy is once again defining our politics – and why capitalism is now winning.

That triumph may be terrific for the czars and great for their industry suitors, but as the founders would likely agree, it is a Pyrrhic victory for America.

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

Henry Paulson’s main claim to fame is getting just about everything wrong in his tenure as Treasury secretary. However, he now stands to gain lasting notoriety as the person who destroyed the domestic U.S. auto industry, and the economies of the Michigan, Ohio, and Indiana along with them.

The story is that the big three automakers are struggling with record sales declines. This collapse in car sales in turn is the fallout from the collapse of the Greenspan-Bernanke housing bubble. While the domestic automakers have been hit hardest, all manufacturers have seen sharp drops in sales. Toyota’s sales were down 23.0 percent compared with its year ago levels. Honda’s sales were down 25.2 percent, and Nissan’s sales fell 33.0 percent.

These huge plunges in year over year sales by the world’s top car manufacturers can’t be blamed on the industry. Responsibility for this plunge lies with Mr. Paulson and other economic policy makers, and their Wall Street friends.

The basic arithmetic is simple. General Motors saw its sales fall by 45 percent compared to its year ago levels. That means its revenue has been cut nearly in half. While it has made some reductions in employment and can ease back its production, there is no way it can reduce its expenses by the same amount. Many of its expenses, like interest costs, property taxes, and health insurance for retirees are largely fixed independent of short-term fluctuations in output.

As a result General Motors is now losing close to $2 billion a month. At this rate, it will burn through its capital in around 2 months and be forced into bankruptcy. Chrysler and Ford are in somewhat better shape, but the basic story is the same. Furthermore, the fallout from a GM bankruptcy could sink Chrysler and Ford as well, as common suppliers shut down and credit for the industry vanishes and customers flee to manufacturers with longer life expectancies.

There have been analysts, presumably including Henry Paulson, who think that bankruptcy is a reasonable solution for the auto industry. This is yet another of Mr. Paulson’s famous mistakes. (Remember, this guy missed the housing bubble completely, thought its impact would be small when it burst, didn’t see a problem with letting Lehman Brothers fail, and thought the TARP [RIP] was a good idea.)

Bankruptcy would allow GM, Ford and Chrysler to more quickly cut back their bloated dealer networks and adjust their car lines with current market demand, as its proponents claim. Bankruptcy would also void union contracts, which will thrill the millionaire bankers by forcing workers earning $57,000 a year to take pay cuts. And, all those lazy retirees will see the health care benefits that they worked for taken away.

That’s the good part. Realistically, bankruptcy is likely to kill all three manufacturers, taking down much of the region’s economy with them.

First, some folks may recall the credit crunch. Lenders are extremely reluctant to take risks. In the absence of government guarantees, it is unlikely that any banks will step forward to provide GM and the others the money they need to keep operating in bankruptcy. In other words, bankruptcy is very likely to mean a complete shutdown of the Big Three.

Let’s say that the anti-bailout crowd suddenly gets a soft spot and decides to guarantee loans to the firms operating under bankruptcy protection. There is still the problem of selling cars. Customers will be very reluctant to buy cars produced by a manufacturer in bankruptcy, since they won’t know if a dealer and supplier network will exist in 3 or 4 years so that they can get their car serviced and buy replacement parts.

While people don’t mind flying an airline in bankruptcy, buying a car is to some extent an investment in the company. Many fewer customers will be willing to invest in a bankrupt car company.

But let’s assume that the investment financing is arranged and that customers are still willing to come through the doors. The bankruptcy itself is still likely to be devastating to the economies of Michigan, Ohio, and Indiana, the three states where Big Three employment is concentrated.

Bankruptcy protects the firm from its creditors. The creditors of these firms are thousands of suppliers who are heavily concentrated in the same states. In most cases, the Big Three manufacturers were their major customers. These suppliers have already been squeezed by falling demand and lower product prices. If they cannot collect the money owed them by the Big Three, there will be a whole chain of secondary bankruptcies.

The impact in these states is potentially huge. According to the Center for Automotive Research, auto related employment accounts for almost 7 percent of total employment in Michigan, 6 percent in Indiana, and 5 percent in Ohio. Losing 7 percent of total employment in Michigan would be equivalent to losing more than 9 million jobs nationwide.

That is Mr. Paulson’s latest plan for the auto industry and these three states. This will be quite a legacy.

There is one last point that should really gall just about everyone. Mr. Paulson has argued that he does not have the legal authority to use the money appropriated for TARP for bailing out the auto industry.

This claim is outrageous for two reasons. As many of us who opposed the TARP argued, it gave Paulson a virtual blank check, and that is pretty much how he has interpreted it, using the money to bail out a wide range of non-bank institutions.

The other reason why this is so galling is that this is an administration that has taken pride in claiming virtually unlimited powers in a wide range of areas, including the conduct of war and holding of prisoners without charges or trial. It would be incredible if they allow Detroit to sink because they claim that they don’t have the legal authority to save it.

By David Sirota
Author of “The Uprising: An Unauthorized Tour of the Populist Revolt”

Remember how Treasury Secretary Henry Paulson promised full transparency in spending the $700 billion bailout money? And remember how bailout opponents predicted that the failure to mandate such transparency would allow all sorts of Halliburton-style shenanigans? From the looks of the first private contracts issued by the Treasury Department, it looks like the bailout opponents were correct.As flagged by

BailoutSleuth.com, Paulson is blacking out the sections of government contracts that spell out how much private firms will be paid for their services in administering taxpayer money. Here’s a page from the compensation part of a contract with Bank of New York, which has been hired to do some of the bookkeeping (because, of course, the Bush administration is happy to privatize that function):

And here’s a page from the compensation part of a Treasury contract with law firm Simpson Thatcher Bartlett – a firm being hired to provide “legal advice” to the government:

Think these are doctored images? Check them out yourself on Treasury’s website – the first contract is here (blacked out section on page 25 of the PDF) and the second contract is here (blacked out section on page 5 of the PDF).So, just to review – within just a few weeks of the bailout passing, our government is blacking out the parts of public contracts that explain how much taxpayer cash private contractors are going to be paid. Perhaps this is what Paulson meant when he promised transparency – by posting these blacked out contracts on the Treasury website, the government is being transparent about exactly where it is being secretive. But I don’t think that definition of transparency really flies, do you?

Of course, I wish I was surprised about this – but one of the major reasons I was opposed to this bailout from the beginning was because (as I and others repeatedly wrote) there is no real transparency at all. Now we know what “no transparency at all” really means.

Dean Baker

 

By Dean Baker
Co-Director, Center for Economic and Policy Research

Okay, we all should be glad that Treasury Secretary Henry Paulson seems to have abandoned, or at least sidelined, his TARP program and instead decided to directly inject capital into the banking system. The problem is under-capitalized banks and that is best solved by giving the banks more capital.

But, there is a big issue about the terms under which they were given capital. Secretary Paulson decided that a 5 percent rate of return on preferred share was good enough for the taxpayers. Warren Buffet got a 10 percent return for his investment.

No one would confuse Henry Paulson for Warren Buffet, but come on — he could get a 4.0 percent return buying treasury bonds. I can’t believe that he had such bad business sense when he was CEO of Goldman Sachs.

The markets gave Paulson’s investment strategy a big thumbs down from the taxpayer perspective. Goldman Sachs shares jump 10.7 percent after the details were made public. Shares of Bank of America rose 16.4 percent and Citigroup’s stock rose 18.2 percent. Obviously the market thinks that Paulson gave the banks a really good deal.

It also seems unlikely that the executive compensation restrictions will have much effect. I doubt that we will hear about any top executives getting big pay cuts because of the bailout, but I will be very happy to be proven wrong.

In short, it seems that we have a whole new group of welfare dependents. Forget Reagan’s mythical “welfare queen” who drove a Cadillac. These folks have private jets and homes on the Hamptons. And, they wreck banks and economies for a living.

Mortgages may be underpriced today, but they retain some value on banks’ books. So rather than purchasing mortgages (a capital-neutral transaction), Paulson could buy bank stock, infusing banks with new capital on top of their mortgages. That would exponentially increase lending capacity, prevent taxpayers from buying toxic assets, give the public a share of future profits, and grant regulators ownership leverage to restructure bank management.

This is where Paulson’s personal proclivities come in.

A crony communist looking to socialize risk and privatize gain would consider these options and choose to buy mortgages – that is, choose to ignore the credit crisis, reward discredited executives and permit banks to keep any subsequent profits – all while inhibiting a potential government-mandated housecleaning of Wall Street. Indeed, the Financial Times’ Wolfgang Munchau says Paulson’s mortgage-buying program is driven by “a wish to benefit the investment banks he once chaired, and which stand to gain handsomely from such a package.”

A businessman, by contrast, would limit taxpayers’ exposure, give us a stake in future gains and demand management control. He would, in short, treat taxpayers like Warren Buffett treats his Berkshire Hathaway shareholders when buying banks with their money.

This is how Sweden successfully confronted its banking crisis in 1992, and how England is addressing its own meltdown today. In fact, world leaders are citing our crony communism as a cautionary tale. “This is not the American plan,” said British Prime Minister Gordon Brown in announcing his bank rescue. “We will have a stake in the banks – we are not simply giving money.”

The bailout bill’s failure to make this course of action mandatory should have killed the legislation in Congress. But banking CEOs and their lobbyists turned “should have” into “didn’t.” They love crony communism and hate government ownership stakes because, as financial analyst Luigi Zingales says, “Nobody likes to pay for their own mistakes – it is much better to have the taxpayers pay.”

Considering the opposition, then, it is a miracle any ownership stake language slipped into law. Whether Paulson now uses that language will signal how deep Washington corruption runs.

Robert Borosage

By Robert L. Borosage
Co-Director Campaign for America’s Future

 Call it extortion. Every American is now being told to ante up $2000 – an estimated $700 billion in all – to bail out the banks from their bad bets, or they’ll bring down the entire economy.

In the speculative frenzy that allowed the Masters of the Universe to pocket millions personally, the banks filled their coffers with toxic paper that no one wants to buy. Now they sensibly don’t want to lend money to each other, since no one knows if the other is solvent. So they go on strike, and threaten to trigger a global depression, if they don’t get rescued. (for more details go here.)

The bail out will take place simply to avoid that depression. But depressions have some salutary effects – the scoundrels go belly up, the weakest get purged. And, in the wake of the disaster, people demand strict regulation of the money lenders to keep their greed in check, and government spends money on the real economy to put people back to work.

So if we’re going to ask Americans to pay to avoid the depression, we better demand the accounting that wouldn’t otherwise take place.

We need a citizens’ plan on the crisis. Here’s a first draft, derived from discussions with a range of independent experts.

No bail out should go forward without the following minimal conditions:

 1. Taxpayer money; taxpayer accountability.

The Treasury wants unlimited authority to spend $700 billion in a revolving fund with no rules beyond its own discretion. We can’t trust the most spectacularly corrupt administration in memory to decide how they’ll cut the deals with the banks. We’d get fleeced. Instead, the law must require an independent entity, with consumers and workers having a majority of the seats on a board with authority to create rules that will prohibit gaming of the bailout. And the Congress – itself sadly compromised by Wall Street money – should be empowered to name independent monitors and to approve all board members.2. Taxpayers share in the upside.

The Treasury bill would buy the bad paper of firms without taking any equity in the firm. That’s an invitation to larceny. If a firm decides to auction off its toxic paper to the US agency, taxpayers should get equity in that firm, in proportion to the assets we buy. That will deter profitable firms from using the agency as a dump for their toxic paper. And it will insure that if the bailout works and the firms become profitable, taxpayers, not simply bankers, benefit from the upside. 3. Shut down the casino.

No bailout of the predators can go forward without new regulation for the financial system – capital requirements, leverage limits, bans on exotic instruments, transparency, limits on compensation schemes. The shadow banking system – hedge funds, private equity firms – must be brought under the glare of regulators. The Federal Reserve should be directed to police asset bubbles. Over the counter trades – like the credit default swaps – should be brought into public exchanges. Some details should be written into the law; Treasury can be mandated to issue more comprehensive regulations by a date certain, with fast track rules for consideration by the Congress. One thing is clear: any promise to do the bail out now and the regulation later is simply a lie. 4. Curb excessive CEO pay.

Wall Street fatcats shouldn’t be pocketing millions taxpayers are forced to bail them out. Any firm that applies for relief must agree to limit the compensation of any executive – pay, bonuses and perks – to no more than the highest pay offered a senior federal official. Future compensation should be linked to profitability.5. Invest in the real economy.

Ending the bankers strike is not sufficient to avoid a serious recession, as consumers tighten their belts. A major public investment agenda – $200 billion or more – for developing new energy and conservation, rebuilding schools and infrastructure, extending unemployment and food stamps, helping states avoid crippling cuts in police and health services – is vital to get the real economy moving and put people back to work. If we don’t do this, the coming recession will raise the cost of the Wall Street bailout dramatically, as credit card, auto and home loan defaults rise.6. Aid the victims, not just the predators.

No bail out of the banks can take place without a freeze on foreclosures and renegotiation of bad mortgages so people can stay in their homes. Bankers and home owners both made a foolish bet that home prices would keep rising. Many homeowners were misled by predatory lenders to taking mortgages that they didn’t understand and couldn’t afford. It would be simply obscene to help the predators and not those that they preyed on.7. Curb the political corruption.

No contributions from Wall Street PACs or executives should accepted by any legislator or candidate for national office. Paid lobbyists of Wall Street firms should be banned from any legislative contacts. Any meeting with representatives of Wall Street – and many will be needed to understand what is happening – should be posted immediately by legislators in a central place on the web. All those employed over the past five years by troubled firms seeking relief should be prohibited from profiting from the bailout. Without this ban, legions of executives from Bear Sterns or Lehman Brothers will create consulting firms to profit from cleaning up the mess that they made.

These demands will be met with howls of outrage, a renting of pinstripes. It will require a Congress, lathered with Wall Street contributions, to demand a deal that makes sense. This won’t be easy, particularly with Republicans apparently lining up en mass to rubber stamp the Bush administration proposals. But trusting this administration to decide without conditions on how to bailout the banks with $700 billion in taxpayers money is simple lunacy.

These banksters have brought the global economy to the brink of the abyss. They want to use that crisis to give the Treasury a virtual blank check to bail them out. Counting the money already spent, more than a trillion dollars will be spent rescuing them from the mess that they have made. Before agreeing to that, Congress has to demand common sense conditions that insure the taxpayers won’t get fleeced, and this won’t be done to us again.

Make your voice heard. Add your comments below. Write Senate Majority Leader Harry Reid, House Speaker Nancy Pelosi and demand that they stand up. Write Senate Republican Leader Mike McConnell and House Minority Leader John Boehner and tell them that saluting the Bush administration is not sufficient. Tell the Committee Chairs Senator Chris Dodd and Rep. Barney Frank that the Treasury proposal is unacceptable. Finance is too important to be left to the bankers. And the bailout is too costly to be left to the Bush administration.

It’s time for citizens to demand common sense.