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The Grand Bargain Meets the Bank Bailouts
Two storylines long in the making are converging in a manner that would be hilarious were they not so radically egregious. In the first, President re-elect Barack Obama is joining his supporters in urging that they, his supporters, ‘make’ him do right by their expectations of him as a liberal Democrat. In the second, one of the myriad stealth bank bailouts that transferred what will end up being around $100 billion in liabilities from the banks to the Federal government through the FHA (Federal Housing Administration) is coming unwound. Where this intersects is that some fair proportion of the bailout money soon to be given by taxpayers to the FHA was already paid to bankers in bonuses just as Mr. Obama was agreeing to cut Social Security, Medicare and Medicaid.
The line tying banker bonuses to ongoing Federal bailouts is indirect, but it exists nonetheless. Beginning before most readers knew that a crisis was unfolding in 2007, Fed Chairman Ben Bernanke and then Treasury Secretary Hank Paulson began locating dumping grounds for bank financial detritus within Federal programs. The FHA was one of the agencies identified, along with then quasi- private Freddie Mac and Fannie Mae. The FHA mortgages insured in 2008 and 2009 are experiencing default rates around 25%– far higher than can be explained by ‘lax’ underwriting standards. (The FHA had fairly rigorous underwriting standards prior to the bank-driven mortgage calamity). And Fannie Mae and Freddie Mac were nationalized in 2008 at an estimated cost of $124 billion. While it has been long known that additional bank bailout costs lurk within Federal agencies, the banks behind the mortgage fiasco were allowed to continue to pay record bonuses.
Barack Obama didn’t enter office until January 2009, so it may seem unreasonable to blame his administration for actions begun before he entered office. However, in the first, Mr. Obama continued the Bush / Paulson bailouts after he entered office and had Mr. Bernanke and Treasury Secretary Timothy Geithner greatly expand them. In the second, his administration’s additional bailouts allowed the banks to continue to pay record bonuses while it was known that the financial garbage still being transferred to Federal agencies would necessitate additional bailouts in the future. In the third, Mr. Obama carried the fully culpable Messrs. Bernanke and Geithner into his own administration adding continuity to bailouts that were largely hidden from the public. In the last, the overwhelming beneficiaries of Mr. Obama’s first term were the wealthy, primarily those who owned financial wealth, as would be expected from policies that favor them.
Where this becomes comical, if decidedly not funny, is that Mr. Obama was publicly stating his intention to cut social insurance programs prior to his re-election. During the first Presidential ‘debate’ Mr. Obama offered that his position on Social Security was close to Mitt Romney’s—both want to cut benefits by raising the eligibility age and changing the index used to adjust Social Security for inflation. The alleged differences between the two lie in Mr. Obama’s claim to want to raise taxes on the wealthy versus further cutting them as Republicans would have it. Time will tell, but Mr. Obama extended the Bush tax cuts for the very wealthy in his first term with no economic rationale for doing so. (The rationale would have been political—not wanting to anger wealthy campaign contributors. The additional ‘deficit’ accumulated while not wanting to anger wealthy campaign contributors will no doubt be deducted from the pre and post-natal care the poor and working poor receive from Medicaid).
In fact, all of the Obama administration’s actions in its first term were designed to restore the incomes and wealth of the rich while ignoring the economic catastrophe unfolding for the poor, the working poor and the rapidly declining middle class. The unconditional and ongoing bailouts of the banks constitute a direct transfer of social resources to a lootocracy that continued to pay record bonuses as it dumped its garbage ‘assets’ on to Federal agencies. Through its QE (Quantitative Easing) programs the Federal Reserve sent the value of stocks largely owned by the rich soaring as millions of ‘homeowners’ lost their homes to foreclosure. (If homeowners who lost their homes to foreclosure were ‘speculating’ on rising house prices, how is that more morally suspect than the rich ‘speculating’ on rising stock prices? But the Fed saw to it that wealthy financial asset owners were taken care of).
Mr. Obama’s supporters who believe they can make him ‘do the right thing’ ignore that he never has in the past. Despite having a majority of the population in favor of a ‘Medicare for all’ healthcare system, Mr. Obama made a secret deal with insurance companies to implement a national version of Mitt Romney’s health insurance scheme for Massachusetts. ‘Romneycare’ has had virtually no effect on reducing medical bankruptcies in Massachusetts and high premiums and deductibles raise profit margins for health insurance providers while leaving adequate health care unaffordable to the working poor and middle class. While results of the Massachusetts program were initially encouraging with more citizens receiving health care, the costs remain prohibitive and are now resulting in many who need health care foregoing it just as before. This trend is unfolding with the state busy throwing anyone they can (legal immigrants) off of the health care rolls to cut costs.
The second order question is: how exactly would people make Mr. Obama ‘do the right thing’ given his ideological commitment to the policies of the corporatist wing of the Democratic Party? An entirely different path could have been taken with the banks—other models for banks bailouts exist (Sweden in the early 1990s) where culpable bankers were fired, bad assets liquidated and heavily regulated banks re-emerged. However, Mr. Obama’s first instinct was to transfer unlimited public resources to demonstrably corrupt, incompetent bankers while hiding large portions of the bailouts from the public (see FHA above). And while an exact accounting is difficult (the value of assets held against bank liabilities are both hidden and inflated by temporary Fed actions), at least several trillion dollars of public resources have been transferred to the banks and some fair portion of that paid out to the bankers who sank the global economy in bonuses.
With ‘discussion’ of the tax code back ‘on the table,’ letting the Bush tax cuts expire is the least of it. The existing tax code supports in declining order (1) inherited wealth, (2) returns on existing wealth (capital gains) and (3) the wages of labor. Given the bailouts and other transfers of social wealth that have made the rich whole while the fortunes of the 99.7% continue to decline, the starting point in ‘negotiations’ should be a 100% tax on inherited wealth and interest income and capital gains taxed well in excess of the rates on wage income. However, what Mr. Obama has publicly stated is his ‘starting’ position is cuts in spending of 2.5X any increases in revenues (see ‘Mr. Obama…’ link above). And again, Mr. Obama has publicly and repeatedly stated his intention to cut Social Security, Medicare and Medicaid. How would he credibly ‘un’ negotiate that, even if he were ‘forced’ to?
And while I have deep respect for some of those arguing that Mr. Obama must be ‘forced’ to do the right thing (Cornel West), prior historical circumstance is not analogous. In the first, Barack Obama is a cloistered right wing ideologue whereas FDR (Franklin Delano Roosevelt) was a political pragmatist. I know exactly how that reads to Mr. Obama’s supporters, but it is true. Barack Obama is a Clinton Democrat and if you go back through the economics of that time what you find is imperial delusions grounded in radical capitalist theory. And Mr. Obama can be heard and read personally articulating the theories of radical neo-liberalism over and over if you only look. In the second, in the 1930s the Soviet Union represented a credible economic alternative to U.S. style capitalism that doesn’t exist today (the Soviet Union, not credible alternatives to capitalism). Finally, Mr. Obama’s suggestion that he could be made to ‘do the right thing’ is in fact a cynical distraction—he has already endorsed the economics of the radical right. His starting position in negotiations is to cut social insurance for hundreds of millions of Americans.
So prepare yourselves dear readers. A lot of economic ‘good will’ was pulled forward to get Mr. Obama and his corporate Democrats past the elections. Ask yourselves why the utterly contrived ‘fiscal cliff’ being used to frighten the gullible masses into supporting policies against their interests was engineered to expire mere days after the election? And why is one of a significant number of bank bailouts long hidden from the public suddenly making a public appearance in need of more money from we, the public? (The facts have been known in a general sense since 2007 and in concrete numbers since 2009). A quick guess is that like with George W. Bush before him, it will be difficult to find anyone who will admit to having voted for Mr. Obama within a matter of weeks. But the Republicans would have been worse, right?
Rob Urie is an artist and political economist in New York