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Michael Winship

By Michael Winship
Senior writer at Bill Moyers Journal on PBS

Now that an entire week or so has passed, it’s possible to make a cool, complete and objective assessment of the meaning of the 2010 vote. Thus, ladies and gentlemen, it becomes clear what this election was all about: jobs.

I mean, just look at Monday’s Washington Post:

The record-breaking campaign showered billions of dollars on a broad array of companies, including broadcast conglomerates, polling firms and small-town restaurants, according to a Washington Post analysis of expenditure reports. Candidates spent at least $50 million on catering and liquor, $3.2 million at country clubs and golf courses, and $500,000 on pizza, coffee and doughnuts, the records show…

The spending came at a fortunate time for many businesses struggling with tepid growth and a national unemployment rate stuck near 10 percent. Experts predict that total spending for the congressional midterms will approach $4 billion, putting it on par with the $3 billion ‘Cash for Clunkers’ program in 2009 aimed at boosting auto sales.

Who says stimulus programs don’t work? Or that all that insane corporate spending on the elections didn’t do some good? Gosh darn it, if you’re an aspiring barista, you’ll be thrilled to learn that Democratic campaigns spent $24,000 at Starbucks, Republicans $17,000. And gym rats and personal trainers, be of good cheer. According to the Post, “The Democratic National Committee spent $41,000 for memberships at a Results gym about seven blocks from its Washington headquarters,” keeping its candidates in physical trim if still flabby when it came to policy, decision making and vote getting. (more…)

Robert Reich

By Robert Reich
Former U.S. Secretary of Labor, Professor at Berkeley

Herbert Hoover’s disciples are making noises even as America moves closer towards a double dip recession.

Fed Chair Alan Greenspan tells the New York Times all the Bush tax cuts should expire as scheduled, even those that benefit the middle class and not the rich. His reason: the nation’s looming deficit requires it.

On Sunday, former Treasury Secretary Robert Rubin, appearing on CNN, says any further effort to stimulate the economy would be “counter productive,” and that policy makers instead should craft a deficit-reduction plan.

Greenspan is only partly wrong. The Bush tax cuts should expire for the top 2 percent of filers (those earning over $250,000) because they save rather than spend a large portion of their incomes, and we need all the spending we can get. The cuts should be extended for everyone else because they’ll spend them. The top 2 percent now receive almost a quarter of total national income, which is one reason why the middle class doesn’t have the purchasing power to lift the economy on its own. The best way to give them even more purchasing power would be to give the middle class a larger tax cut — say, a payroll tax holiday on the first $20,000 of income.

Rubin is entirely wrong. As Friday’s jobs report shows, the gap between total private spending (consumers plus business plus net exports), on the one side, and the nation’s capacity to produce goods and services at or near full employment, on the other, is still a chasm. So government needs to do more spending now, in the short term, in order to get people back to work and the economy back on track.

In 1999, both Greenspan and Rubin urged Congress to repeal the Glass-Steagall Act that had safely separated commercial from investment banking. In 2000 they argued against allowing the Commodity Futures Trading Corporation to regulate derivatives. Until recently, Rubin ran the executive committee at Citigroup, whose excesses required a massive taxpayer bailout. In 2001 Greenspan supported the Bush tax cuts that blew a gigantic hole in the federal deficit and mostly benefited the wealthy. In 2002 he lowered interest rates to near zero but refused to oversee how banks were using their almost-free borrowings.

Both Greenspan and Rubin are deficit hawks. So was Herbert Hoover and so was Hoover’s Treasury Secretary Andrew Mellon. And look what Hoover and Mellon got us into. When we least need him, Hoover is being exhumed.

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Cross-posted from Robert Reich’s Blog

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Robert Reich is Professor of Public Policy at the University of California at Berkeley. He has served in three presidential administrations, most recently as secretary of labor under President Bill Clinton. He has written twelve books, including “The Work of Nations,” “Locked in the Cabinet,” and his most recent book, “Supercapitalism.” His “Marketplace” commentaries can be found on publicradio.com and iTunes. For copies of his articles, books, and public radio commentaries, go to www.robertreich.org.

Dean Baker

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

I worked at the Economic Policy Institute (EPI) for 6 ½ years. During this time, the credibility of my work and that of my colleagues was often impugned by describing EPI as “labor backed.” This was partially true, we got 20-25 percent of our funding from unions. However, the clear implication of this identification was that our ties to labor called our integrity into question in a way that large amounts of corporate tied money did not affect the integrity of other think tanks.

I am reminded of this because I was at the Peter G. Peterson’s Foundation deficit fest this morning. I left as Peter Peterson took the stage with Robert Rubin. The hypocrisy around this sight was more than I could bear. Actually, I left because I had work to do, but this sight was still pretty painful.

Peter Peterson and Robert Rubin are both enormously wealthy men. (They joked about dividing their lunch tab based on their net worth.) They are lecturing the country on the need to cut Social Security and Medicare benefits for retirees who have a tiny fraction of their wealth. Many of the victims of the cuts that they would push are people who are already struggling.

This would be difficult to accept in any case, especially since there are ways to get the long-term deficit down to size that don’t involve nailing middle income and/or poor people. However, it would be hard to find two people who have benefited more from taxpayer handouts than these two individuals.

Peter Peterson has been the recipient of tens of millions of taxpayer dollars through the fund manager’s tax break. This tax break, which is also known as the “carried interest tax deduction” allows managers of hedge and equity funds to pay tax on their earnings at the 15 percent capital gains tax rate, instead of having it taxed as normal income. As a result, Peterson paid a lower tax rate on much of his earnings than tens of millions of people working as school teachers, fire fighters, and other middle income jobs.

Peterson not only collected the money himself, he came to Washington in 2007 to lobby Congress when it debated ending the tax break. He apparently wanted to make sure that his friends would still be able to benefit from this tax break even after he had retired.

After setting the country on a course for the current crisis with the policies he pushed as Treasury Secretary, Robert Rubin went to work as a top executive at Citigroup. In this capacity, he earned $110 million before leaving the company in the middle of its 2008 meltdown. As we know, Citigroup was one of the major actors in the housing boom. It produced hundreds of billions of dollars worth of mortgage backed securities.

It would have gone belly up in the crisis were it not for tens of billions of dollars in taxpayer loans and hundreds of billions in guarantees. (That the government’s guarantees restored Citi to life, which allowed us to get our money back is beside the point.)

Rubin’s public line is that he should not be blamed for Citi’s collapse or the role it played in bringing down the economy; he really didn’t know what they were doing. This is an interesting claim for someone who got paid $110 million by the bank. Presumably Citi could have employed someone who didn’t have a clue about what was going on for something considerably closer to the minimum wage. In any case, being at the center of a collapsed megabank that helped bring down the economy would not ordinarily be a credential that would give a person standing to lecture the country about fiscal policy and the need for sacrifice.

Yet, in Washington in 2010, Peterson and Rubin hold the high ground, lecturing the rest of us on the need to tighten our belt. As I said, I have work to do.

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This post is part of the Virtual Summit on Fiscal and Economic Responsibility For People Who Did Not Wreck The Economy. 

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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 on TPMCafe.

Robert Borosage

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

Were the big banks all knowingly running Ponzi schemes? That’s the question that arises from the stunning hearings held this week by the Senate Permanent Committee on Investigations, chaired by Senator Carl Levin, on the collapse of Washington Mutual, the largest thrift failure in the U.S.

Faced with looking like fools or knaves, the barons of the big banks— from Robert Rubin to Lloyd Blankfein to WaMu’s Kerry Killinger—have chosen, not surprisingly, the fool. But the WaMu hearings—and Zach Carter’s stunning running commentary on them—suggest that while Bernie Madoff may have been the extreme, he wasn’t the exception. (Note: Carter blogs for the Campaign for America’s Future, which I co-direct.)

The Levin hearings show that WaMu systematically peddled loans to people it knew could not pay them back. This wasn’t an accident. Levin exposed a WaMu internal audit that reviewed 132 loans, and found 115 involved confirmed fraud, with 80 having “unreasonable” income—meaning the income listed on the loan was so preposterous that any reasonable person, much less a trained loan officer, would have called it into question. The audit resulted in no—zero, nada—changes in WaMu’s lending practices. Fraud wasn’t a problem; it was the business plan.

As Carter summarizes:

According to the FBI, 80% of mortgage fraud is committed by the lender. We’re not talking about stupid loan officers allowing borrowers to get away with something crazy that is bad for the bank. We’re talking about clever loan officers pushing fraudulent documents in order to score bigger paychecks, and bank executives looking the other way so that they can keep getting big paychecks from the securitization machine. This isn’t a problem unique to WaMu. This is how the U.S. mortgage system operated for half a decade.

WaMu particularly pushed predatory option-ARM loans, loans with an initial monthly payment so low that it often didn’t even pay off the interest on the loan. Then after a couple of years, the monthly payment explodes—and the loan becomes unaffordable.

WaMu actively trained its personnel to convince skeptical borrowers to take these loans because option ARMS received a very high yield when packaged into securities. So WaMu’s compensation schemes rewarded loan officers for the number of loans sold, not the quality of the loans. Stunningly, Levin cited internal memos showing that even loan officers under investigation for fraud were rewarded with trips to Hawaii and the Bahamas for their high production.

WaMu packaged the fraudulent loans into securities and sold them to investors, or peddled the loans to investment banks that did the same. Even after WaMu’s own internal audits reported that a high percentage of the loans were fraudulent, WaMu still sold them to investors. Worse, even after WaMu’s own study showed that the default rates on option ARMS were going to be staggering, WaMu rushed to peddle even more of these loans to investors on an “urgent” basis. As Carter reports, “They not only packaged existing option-ARM loans into securities, they issued as many new option ARMs as possible, in order to score securitization profits before the market collapsed.” CEO Kerry Killinger testifies that he doesn’t know if it would have been appropriate to tell investors what the company knew about default rates. “I don’t know what actually happened,” says Killinger.

As Carter summarizes, this was essentially a Ponzi scheme, similar to Madoff’s:

Making truckloads of fraudulent loans can only end in disaster, but WaMu [executives weren't] really interested in the long-term picture. They were only interested in their ability to book these loans for big, short-term profits. Even when those bad loans finally took the company under, it had been, in a sense, a success. Its executives had already made millions.

WaMu’s [executives were] in many ways operating a simple Ponzi scheme. Their risky loans were going bad, but the company was trying to counter those inevitable losses with the short-term profits from issuing more risky loans. That’s basically how Bernie Madoff’s scam worked, except he wasn’t using make-believe loan profits, he was using make believe stock returns. So long as the bubble keeps growing, the scam could keep moving. But when the bubble burst, there was no way to keep issuing lots of loans in an economy where home prices were plunging.

The one divergence from the Ponzi scheme is securitization — if WaMu could dump the bad loans off its books, then it wouldn’t have to eat the inevitable losses. But that doesn’t reflect well on WaMu– it means [the executives] were deceiving and abusing investors.

Why run this scheme that would lead to the ruin of the bank? Because the executives were making out like, well, like bandits. Killinger, the CEO of WaMu, was taking home $11 million to $20 million a year during the housing boom.

As Carter points out, what WaMu was doing in mortgages—originating mortgages that they knew would default, cutting them up into securities, and marketing them to investors without notice—isn’t much different than what Goldman Sachs was doing in synthetic subprime CDOs: creating securities that it knew would fail in order to bet against them, while selling them to investors without notice.

These guys weren’t fools. They knew what they were doing. They knew that the music would stop some day, and the reckoning would come, or more likely, the Feds would step in and bail them out. (Amazingly, Killinger is still outraged that WaMu wasn’t bailed out rather than put out of business.) But they kept dancing because they were cleaning up along the way.

In the last two weeks, the Financial Crisis Inquiry Commission and the Levin hearings provide a stunning picture of the industry. The good cop, FCIC, treats the bankers as experts, listens to their opinions, and lets them claim the role of fools. “We didn’t know.” “We didn’t realize housing prices wouldn’t always go up”. “We weren’t responsible.”

Then yesterday, the bad cop—the Levin committee—exposed the inner working of what former bank regulator William K. Black calls “control fraud,” a business model based upon fraud as central to its profitable operations. It is hard to believe that WaMu or Madoff is an exception. Levin should probe every major bank engaged in the securitization of mortgages.

Is it likely that their bank officers were fools? Or that they were prepared to turn their heads or hold their noses because the rewards were so great? Ignorance is their defense, not their condition. They knew what they were doing. The rest is for a prosecutor to sort out.

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Robert Borosage and Campaign for America’s Future Co-Director Roger Hickey are co-editors of the book, The Next Agenda: Blueprint for a New Progressive Movement.

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This piece is re-posted from the blog site of Campaign for America’s Future – Blog for America’s Future.

Dean Baker

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

As Treasury Secretary, Robert Rubin put in place all the pieces that set up the economy for the disaster that we are now living through. He pushed legislation that weakened regulation of the financial sector; he cheered on a stock bubble that eventually grew to $10 trillion and he established an over-valued dollar as a matter of official policy.

He then left to take a top job at Citigroup where he was able to enjoy the fruits of his labor. He earned well over $100 million in the decade after he left the Clinton administration. In the fall of 2008, when Citigroup was saved from bankruptcy with a taxpayer bailout, Rubin quietly slipped out the back door (with his money), resigning from his position at Citigroup.

It may not seem just that someone like Rubin would be allowed to live out his life in luxury after the policies that he promoted and personally profited from led to so much suffering for so many people. But that is the way things work in the United States these days. However, what is even more infuriating is that he doesn’t seem to have any intention of going away. He is still pontificating on the economy and desperately trying to rewrite history to exonerate himself.

In a recent public talk, Rubin told his audience that “virtually nobody” saw the financial meltdown. Therefore, he excused himself for missing it along with everyone else. While it may be true that the top people in policy circles and among the Wall Street crew with whom Rubin associates really are clueless about the economy, it was in fact very easy for a competent economist to see the crisis coming.

House prices diverged from a 100-year long trend in the mid-90s, just as the stock bubble began to pick up steam. By 2002, nationwide house prices had risen by more than 30 percent after adjusting for inflation. This followed a 100-year period in which they had just kept even with the overall rate of inflation.

There was no plausible explanation for this run-up in house prices based on the fundamentals of either the demand or supply side of the housing market. Income and population growth were relatively slow by historical standards. In addition, we were building homes at a near record pace, so there clearly were no major obstacles on the supply side. Furthermore, there was no remotely comparable increase in rents, so there was no evidence of an undersupply of housing; a fact that was also borne out by the record vacancy rate of this era.

So, it should have been clear to Robert Rubin and every other economic analyst that the housing market was in a bubble. When I first began writing about the bubble in 2002, it had already created more than $2 trillion in housing-bubble wealth. By its peak in 2006, the bubble had grown to more than $8 trillion. Could anyone believe that $8 trillion in housing wealth could disappear without serious consequences for the economy? This was the most predictable disaster imaginable. There was no excuse for the people in policy positions having missed it.

This is why it is infuriating to see Rubin still running around with his stories about “virtually nobody.” The response is that anyone who had a clue could not miss the housing bubble and they should have done everything in their power to try to deflate it before it reached ever more dangerous proportions. Rubin did the opposite — he put in place bubble friendly policies as Treasury secretary, then profited enormously from these policies after his return to Wall Street.

Reading Rubin’s comments, it is hard not to think of George Wallace. The former governor of Alabama made his name on the national stage as an ardent supporter of segregation, famously blocking the schoolhouse in front of young black children trying to attend a previously segregated school.

Later in his life, Wallace had a change of heart and regretted his earlier actions. He went around to commemorations of major events in the civil rights era and begged for forgiveness. Wallace’s presence at these events was no doubt painful for many of those who had to confront the brutality of the racist system in which Wallace had played such a key role. He could have served the world much better with more private expressions of contrition.

Having inflicted enormous damage on tens of millions of families who have lost their jobs, their homes and/or their life’s savings, it would be nice if Rubin could have the decency to fade from the public scene. At least Wallace had the integrity to acknowledge that he had been wrong.

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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 on Huffington Post.

Dean Baker

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

Robert Rubin’s reputation has taken a serious hit in the last couple of years. After getting glowing reviews for his stint as treasury secretary in the Clinton administration, the world has now seen the fallout from the financial deregulation that he engineered and personally profited from to the tune of $110 million for his work at Citigroup. He now ranks only slightly ahead of Reverend Wright and Bill Ayers on the potential guest list at the White House.

In spite of his plunge, Robert Rubin is still overrated. In addition to his other pearls of what passed for wisdom, Robert Rubin was also the chief architect of the “strong dollar” policy. Lloyd Bentsen, Rubin’s predecessor as treasury secretary, was quite happy to see the dollar fall.

The logic was straightforward: A lower dollar would improve the US trade deficit. If the dollar falls relative to the euro, yen and other currencies, then it is more expensive for people in the United States to buy imported goods. Therefore, they buy domestically produced goods instead.

Similarly, if the dollar falls in price relative to other currencies, then it is cheaper for people living in other countries to buy US exports. This will increase US exports, thereby further reducing the trade deficit.

A lower valued dollar was in fact supposed to be one of the main dividends of the deficit reduction policy that President Clinton pursued from the start of his presidency. The argument was that lower deficits would lead to lower interest rates in the United States. If interest rates in the United States fell, then foreign investors would buy up fewer US government bonds and other financial assets. This gave us the lower dollar and improved trade deficit.

That was more or less the picture until Rubin succeeded Bentsen as treasury secretary in 1995. Rubin began touting the strong dollar. He was able to put some muscle behind this policy two years later as a result of the East Asian financial crisis. Rubin got the IMF to impose a policy on the countries of the region that essentially called for them to repay their debts by exporting like crazy to the United States. This meant taking advantage of currencies that were grossly undervalued relative to the dollar.

The financial crisis kicked off the era of exploding trade deficits. At its peak in 2006, the trade deficit was equal to 6.0 percent of GDP, approximately $900 billion in the current economy.

The big trade deficit was not the whole story. For those who know accounting, a large trade deficit implies a large budget deficit. In other words, even if they yelp endlessly about budget deficits being too high, proponents of a high dollar policy in fact support large budget deficits.

To see this, imagine an economy with full employment and no trade deficit. Now, suppose that we just started buying 6 percent of our goods from abroad, instead of domestically produced goods. In this case, we would suddenly be in a situation in which the economy was well below full employment. Demand would have fallen by 6 percent, leaving roughly 9 million people out of work.

If the trade deficit remains in place, then there are two ways to replace the demand lost to imports. We can either have a big burst of spending from the private sector, which means less private sector savings, or we can have a big burst of spending from the public sector, which means less public sector saving.

In fact, we actually got some of both in the last decade. We did run fairly large budget deficits in the Bush years. However, a more important factor in boosting the economy was the extraordinary boost to consumption that resulted from the $8 trillion in artificial wealth generated by the housing bubble. As a result of the bubble driven consumption, which pushed the household saving rate to zero, the economy was able to maintain reasonably high levels of employment, in spite of a trade deficit equal to 6 percent of GDP.

Of course, the bubble has now burst and the consumption driven by bubble wealth has also largely disappeared. This means that if the economy is going to sustain high levels of employment in spite of a large trade deficit, then it will need to run very large budget deficits.

In short, because a high dollar leads to high trade deficits, it means that the country must run large budget deficits to sustain high levels of employment. In other words, a high dollar means a high budget deficit.

Does Robert Rubin know that his strong dollar policy directly contradicts his fixation with low budget deficits? Who knows and who cares? Either he is ignorant of the fundamentals of economics or he is dishonest. Either way, he is not the sort of person who should be taken seriously in economic policy debates. He belongs well below either Reverend Wright or Bill Ayers on the White House invitation list.

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 Dean Baker is the author of the new book, “Plunder and Blunder: The Rise and Fall of the Bubble Economy.”

This piece was first published on Huffington Post.

Dean Baker

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

The Detroit automakers have made many mistaken business decisions that have been important factors contributing to their current crisis. However, they are not responsible for some of the factors that have brought them to the brink of bankruptcy.

Most obviously, they are not responsible for the collapse of the housing bubble and the subsequent loss of more than $15 trillion in housing and stock wealth. This falloff in wealth has sent consumption plummeting. The auto industry has been especially hard hit, with sales falling by more than 30 percent year over year in the last two months.

The Big Three are also not responsible for the broken U.S. health care system. If we paid the same amount for health care as Canada, G.M. would have accumulated an additional $22 billion in profits over the last decade.

That would be the savings if we assumed that General Motor’s health care expenditures were reduced by roughly 48 percent to be in line with expenses in Canada. Of course, not all the savings in this counterfactual would have gone to profits. Some of it would have gone to workers in the form of higher wages or to consumers in the form of lower car prices.

On the other hand, G.M. is also picking up the tab for many spouses and dependent children. It would not have to pay these health care expenses in a Canadian type system. So the $22 billion figure is probably not a bad first approximation of the additional money that G.M. might have today if the United States had a more efficient health care system.

Even with these additional profits G.M. and the other domestic manufacturers would still face serious problems. They have made some bad choices in betting their future on SUVs and other low-mileage vehicles. They also have lagged foreign manufacturers in producing high quality, reliable cars.

But the real reason that Big Three are on their deathbeds right now is the economic crisis created by the Wall Street crew and their friends in Washington. It will be tragic if the people of the Michigan, Indiana, and Ohio are made to suffer through a depression because of the failed financial dealings of the Wall Street crew.

This situation is made even worse by virtue of the fact that most of the Wall Street executives who are directly responsible for this disaster are still quite wealthy, in large part because of the generosity of Congress and the Bush administration. While they demanded that the auto manufacturers produce plans for returning to profitability in exchange for providing loans, no similar conditions were imposed on Citigroup and the rest of the Wall Street gang.

As the autoworkers at the Big Three look at their last paychecks before an indeterminate period of unemployment, they should think about the portion deducted for income taxes. With this money, they have helped to ensure that Robert Rubin and other Wall Street types continue to enjoy pay packages in the millions or even tens of millions of dollars.

Happy Holidays!

Dean Baker

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

Every few years there is a book or movie that stands out for its incredibly bad timing. As the Internet bubble exploded in 2000, the book Dow 36,000 quickly went from a work of inspired genius to intense derision. More recently, the 2005 book, Why the Real Estate Boom Will not Bust and How You Can Profit From It, has become one of the great jokes of the housing crash. As the country and the world attempt to recovery from the wreckage caused by these bubbles, the new documentary, IOUSA, seems destined to join these two earlier classics of bad timing.

The basic story of IOUSA is that the United States suffers from a massive deficit problem. The film constantly comes back to the deficit using a variety of measures that are intended to scare viewers into action. After seeing the film we are all supposed to run to our phones and computers and demand that our representatives in Congress shut down Social Security and Medicare and double our taxes.

Hopefully, the film will not have this effect, because there is nothing that the economy needs more right now than very large deficits. The collapse of the housing bubble has destroyed more than $5 trillion in wealth. The fallout from this collapse has led to an even larger decline in stock market wealth. This massive loss in wealth in turn is leading to a plunge in consumption that is driving the economy into the most serious downturn since the Great Depression.

Economists from across the political spectrum agree that the only way to counteract this loss of consumption demand is through large increases in government spending. If IOUSA viewers manage to persuade their representatives in Congress to balance the budget then they will be guaranteeing the country another Great Depression.

Ironically, the heroes of IOUSA include many of the leading villains of the current economic crisis. The story prominently features Peter Peterson, whose foundation is helping to circulate the film. Mr. Peterson made a fortune running a Wall Street private equity fund, much of which he was able to shelter from normal taxation through the “fund managers’ tax break.”

Mr. Peterson is fond of telling audiences that he doesn’t need his Social Security. Of course, no one would need their Social Security if they received tens of millions of dollars in tax breaks like Mr. Peterson.

The extensive media coverage that Mr. Peterson has received for his anti-Social Security and Medicare diatribes also helped to distract attention from those trying to call warn of the dangers looming from the housing bubble. While Peterson and his followers could count on extensive coverage from National Public Radio, the Washington Post, and other highly respected media outlets, those warning of the imminent crisis were almost completely ignored.

The film also interviews Robert Rubin. As Treasury secretary Robert Rubin promoted an over-valued dollar. The over-valued dollar made our goods uncompetitive internationally by raising the price of U.S. exports to foreigners and lowering the price of foreign made goods to people living in the United States. As a result, our trade deficit exploded, peaking at almost 6 percent of GDP ($800 billion) in 2006.

Rubin also pushed the one-sided financial deregulation that fueled the irresponsible lending practices of the housing bubble years. These were practices that he personally profited from as a top executive at Citigroup.

Finally, the film gives a starring role to former Federal Reserve Board Chairman Alan Greenspan. Greenspan will go down in infamy as the man who looked the other way as the housing bubble soared to ever more dangerous levels. He also claimed to be oblivious to the explosion of subprime and other high-risk loans during his tenure as Fed chair. More than any other individual, Alan Greenspan bears responsibility for the economic catastrophe facing the country. Audiences may find his lectures on the need to increase saving less than compelling at this point.

There is a grain of truth to the IOUSA scare story. The country has a badly broken health care system. If we don’t fix the health care system then it will cause serious damage to the economy and lead to large budget problems in future decades since the government picks up roughly half of the tab for health care through programs like Medicare and Medicaid. Unfortunately, the film never clearly mentions the need for health care reform, focusing only on the budget and not the underlying problem with the private health care system.

The moral of the IOUSA story – the need to reduce the budget deficit – is so radically out of sync with the economic imperatives facing the country that it is likely to quickly fall from sight, perhaps to be resurrected in film festivals showing red scare films from the fifties. This would be a positive development for the country, since it would be an enormous tragedy if this film helped to dissuade the public from supporting the sort of stimulus package needed to prevent a long and extremely painful recession.

The director of the film, Patrick Creadon, is highly talented and clearly well meaning. Obviously he just fell in with a bad crowd when he decided to make IUOSA. Maybe for his next two films he should interview the authors of Dow 36,000 and Why the Real Estate Boom Will not Bust and How You Can Profit From It. This could be marketed as the “people who really got it wrong” series.  

Leo W. Gerard

By Leo W. Gerard

International President

Congress drove the Big Three CEOs out of Washington, D.C. last week, ordering them not to return with their tin cups until they could guarantee their companies would be viable after a $25 billion bailout.

Just days later, Citigroup, a bank that had already received a $25 billion bailout in October, held its hands out for more. Within 48 hours, federal officials approved giving the bank another $20 billion and providing backing for $306 billion in its risky loans and securities. Even though Citigroup was failing just weeks after getting its first government bailout, Congress didn’t subject its CEO to the public lecturing and demands for business plans that it did the Big Three.

The message here could not be more clear: Washington will bailout out those who shower before work but not those who shower afterwards.

Washington, D.C. is a white collar town. President Bush and members of Congress understand their suited counterparts on Wall Street. In fact, several prominent figures in the banking industry – including Citigroup’s Robert Rubin, a former Secretary of the Treasury, and UBS Investment Bank’s Phil Gramm, a former Texas Senator, – worked in Washington first, aiding and abetting the current crisis by de-regulating the financial markets and everything else they could.

Detroit, by contrast, is a blue collar town. It’s a place where workers at the Big Three earn thousands of dollars — the average production employee making $67,480 last year — not hundreds of thousands, and certainly not Wall Street’s millions. The Citigroup CEO credited with overseeing the bank’s ill-fated investments, Charles O. Prince III, was forced out a year ago as the bank’s massive sub-prime losses began mounting but the board of directors still gave him a $12.5 million bonus, $68 million in salary and accumulated stockholdings, a $1.7 million pension, an office, and a car and driver for up to five years. Heading the board executive committee at that time was Rubin, who would briefly serve as chairman and receive $17 million in compensation as the bank declined further into financial ruin.

Detroit is a place where workers are unionized; Wall Street is not. And right-wing Republicans and conservative pundits have made it clear they want the union workers to suffer. They want federal aid denied to the Big Three so that the firms go bankrupt. Then the companies can renege on pensions they guaranteed to retirees and can break salary and benefit promises to workers in current contracts.

Senate Minority Whip Jon Kyl writes on his web site that Chapter 11 bankruptcy would be best for the Big Three because it would enable them to break their pledges to retirees receiving health care and other benefits earned over decades of service, what he calls “legacy debts”: “Like many other industries, including the airlines, the goal under Chapter 11 is to gain temporary protection, reorganize in a way to reduce legacy debts, and emerge as a more viable and competitive company.”

Conservative columnist George Will, similarly, wrote: “Do nothing that will delay bankrupt companies from filing for bankruptcy protection, so that improvident labor contracts can be unraveled. . .” Will’s fellow Washington Post Columnist Martin Feldstein blamed all of Detroit’s problems on the unions, writing that the basic reason the Big Three can’t compete: “is labor costs imposed by union contracts.” He said if Congress gives the Big Three a loan, it must require “that the unions accept reductions in wages and benefits to levels that allow the firms to compete with imports and with non-union U.S. auto firms. The trustees of retiree benefits should be required to accept reductions in those benefits.”

They want the unions broken. They want retirees’ benefits slashed and union workers’ wages and benefits cut, which, of course, will enable the foreign auto makers – whose U.S. plants are non-union – to reduce their wages. It’ll be an all-American race to the bottom, rather than the preferable opposite, where workers and retirees are treated with dignity and respect for their hard labor.

None of those conservatives, however, is calling for Citigroup’s Charles O. Prince III, who took down Citigroup at a cost of untold billions to taxpayers, to return his $1.7 million pension, office and car and driver.

Unlike Citigroup and the other Wall Street banks, which have their very own inside-the-beltway apologists in the form of Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson to argue their case before Congress, the Big Three CEOs had to appear before Congress to plead for themselves.

There, legitimately, lawmakers grilled them about flying to the hearings in expensive private jets and about their multi-million dollar compensation packages. Still, none of the lawmakers has asked Citigroup’s CEO, Vikram S. Pandit, to take $1 for next year’s compensation, as they did the auto executives. Nor have they asked any of the CEOs from the nine banks that shared $125 billion in bailout money in October to sell their private jets, as they did the auto executives.

Conservatives also argued that the Big Three should be left to die because in a free market, that’s what happens to poorly operated companies offering inferior products.

Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, said, for example, “I do not support the use of U.S. taxpayer dollars to reward the mismanagement of Detroit-based auto manufacturers.”

Shelby made this accusation while part of the Congress that ran up the largest federal deficits known to man and allowed Paulson to broker a deal to sell troubled Wachovia bank to troubled Citigroup – a bank that so far got two bailouts, the first of which arriving within weeks of the failed Wachovia marriage.

Shelby, of course, has a lot to lose if Michigan does well. His home state of Alabama gave tax breaks to foreign car companies Mercedes-Benz, Honda and Hyundai to locate factories there – hardly a free market approach.

So, like many conservatives, he twists reality to suit his circumstances. He’s right that American car companies made mistakes. In October, GM’s sales were off 45 percent from the year before, Chrysler 35 percent and Ford 30. But he’s wrong about that being a result of mismanagement alone, well, unless he thinks his precious foreign car companies made the same mistakes. Toyota was down 23 percent, Honda 25 and Nissan 33 for the same month.

And if aid denial is based on bad products, Wall Street definitely should be the first refused. Its firms built and sold what are now being called “toxic securities,” products so defective that they took down banks, the U.S. economy and international financial stability – creating the deepest economic crisis since the Great Depression. Now that’s mismanagement for you!

When the representatives of blue collars went to Congress hat in hand, lawmakers insisted that to get loans automakers would have to present viable business plans. Congress didn’t impose similar conditions, however, when Bernanke and Paulson went to Congress seeking grants for reckless white collar firms.

In fact, they gave $125 billion to nine big Wall Street banks in October, contending the direct infusion of money would melt frozen credit. It didn’t. The firms apparently didn’t lend the money, and the deal didn’t require them to. There’s a viable business plan for you!

Paulson and Bernanke gave insurance giant AIG $85 billion. And when that didn’t work, they forked over more until it all added up to $150 billion. Now, it’s not clear that will be enough to resolve AIG’s problems. Sen. Jon Kyl, the Republican from Arizona who voted for the Wall Street bailout, didn’t demand a viable business plan for AIG or Citigroup, yet said this about the auto industry request: “There’s no reason to throw money at a problem that’s not going to get solved.”

This year, as Wall Street’s recklessness destroyed the American economy, a million Americans lost their jobs. It’s no wonder no one is buying cars. It’s not just that they can’t get credit. It’s also that they don’t have money to spend or they’re afraid to spend the money they have.

Some of those furloughed had been on Wall Street. Citigroup announced recently it would cut 52,000 jobs by early next year. But of the million jobs lost so far, 100,000, or one in ten, have been auto workers or employees of auto suppliers. Unemployment in Michigan is 9.3 percent – while in the rest of the nation it is 6.5.

Just like Paulson who couldn’t see that Citigroup was too weak to buy Wachovia, the conservatives intent on denying the Big Three loans are shortsighted. They don’t see that 2.3 million jobs in and dependent on the auto industry could be lost. They don’t see the effect of slashing the wages and benefits of people who get their hands dirty for a living.

It would mean even more mortgage foreclosures and even more credit card debt unpaid to those struggling banks. It would mean the Big Three defaulting on the $100 billion they owe to those weak banks and bondholders, some of which is secured, some not.

It’s the big circle of economic life. If Congress spits on the autoworkers and the millions whose jobs depend on the Big Three, the lawmakers may find themselves using more and more taxpayer dollars to scrub new blood off Wall Street.

Dean Baker

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

Okay, as we all know now that almost everything about Joe the Plumber is a lie. He doesn’t own a plumbing business and apparently is not even licensed as a plumber, but he does raise a legitimate concern about “spreading the wealth around.” The only problem is that in this country, when the government spreads the wealth around it usually means redistributing it upward.

That is certainly the case with the hundreds of billions of dollars being used to bail out the banks. The public has a real interest in keeping the banking system functioning. It has zero interest in subsidized the pay checks of wealthy bank executives or enriching the bank’s shareholders, which Secretary Paulson is now doing.

There is no question about what is going on here. The public is providing massive subsidies to the country’s major banks. The terms of the bailout were far more generous than what the banks could get from the private market. As a result, banks that might not have survived otherwise, or at least would have been forced to make serious cutbacks, can now keep operating as they had been.

This means that their high level executives will continue to draw salaries in the millions or tens of millions of dollars. It also means that the shareholders will continue to receive dividends.

This was not inevitable. Paulson could have imposed serious pay caps on executive compensation. In Germany, the banks that are getting government money can’t pay their executives more than 500,000 euros, about $680,000. The United Kingdom also limited executive compensation as part of its bailout.

In addition, the banks in the UK are prohibited from paying dividends as long as they have public capital. This makes sense not only as a punitive measure, but it will also help them to build up the capital they need to stay in business.

It has sometimes been argued that the healthy banks would not take part in a bailout under such conditions. Let’s see.

Suppose we apply the compensation limits/no dividend bailout rules, and then give everyone the option to opt in or out. Those taking the opt-out route will not benefit from the government’s extension of deposit insurance nor will they be able to count on access to the Fed’s discount window. My bet is that no banks go this route, but if any do, there will be plenty of investors happy to short their stock, assuming the government allows it.

But, Paulson went the bank welfare route. Joe the Plumber and everyone else should be very upset about this method spreading around the wealth. The top executives at the big banks will be getting the equivalent of several thousand years of TANF checks for a mother with two kids. And, unlike the mother receiving a TANF check, the bank honchos inflicted serious damage on the economy.

The big question is, which candidate is opposed to this sort of spreading around the wealth?