Economic Recovery for Whom?

Banks and financial institutions created a speculative bubble in the housing market and made huge profits selling exotic securities bought with borrowed money. Somehow, they lost control.

Now people are discovering they aren’t as rich as they thought they were. Home values fell precipitously; they lost their jobs and credit dried up. No one is to blame except perhaps the generic “bank,” yet everyone is to blame because they spent money they didn’t have.

With the economy overextended and corporations overleveraged, banks suddenly couldn’t cover their outstanding obligations. A resulting credit freeze threw the U.S. and the international economies into a tailspin.

That’s the message of two former directors of the Office of Management and Budget: Alice Rivlin from Clinton’s administration and Jim Nussle from Bush’s administration, speaking at the Panetta Institute 2009 Lecture Series in Monterey on April 13.

Nussle contended the worst is behind us. Decreasing housing values were only on paper; a hard concept to explain to people who thought their property was worth its accessed evaluation and were overtaken by a “reckless euphoria.” We shouldn’t waste our time finding “someone to blame” because we fooled ourselves into thinking we didn’t have to pay our debts. Illegal bank activities should be prosecuted but, essentially, the fault is our own.

“The good news is we missed the grand depression,” said Nussle. “I’m an optimist and we have to plug away in a positive direction.”

Rivlin was much more nuanced throughout the discussion, stating frankly that we don’t know if the crisis is over or whether the stimulus package will work-call her guardedly optimistic: Government intervention is aggressive and has a good chance of working; recovery depends upon whether credit begins to flow again; and unemployment will continue to rise for some time.

“People in high places should have known better,” Rivlin said. “Lending standards got very lax and regulators took no responsibility. People making loans took no responsibly for them: They revealed a serious flaw in the system.”

Both Nussle and Rivlin agree that some banks are “too large to fail,” and need a bailout. Toxic assets must be taken off the books and TARP, the Troubled Asset Relief Program, may succeed. While the two clashed over the role of government, they both agreed that the government must play a role because the whole financial system is so dependent on banks that their failure could lead to a deep depression. Both claim bankers shouldn’t be rewarded by a bailout, but reiterate our dependence on banks.

Considered a “hard-core conservative” for his anti-abortion, anti-gay, anti-environmental, pro-NRA, pro-war and 90 percent pro-business voting positions while in Congress, Nussle yammered away on favorite GOP topics: lowering taxes and eliminating government waste. “It’s your money,” he declared. Freeze the federal budget, cut Social Security and Medicare funding, oppose regulation that will starve innovation, and create new “entrepreneurs.” He failed to recognize that such moves led to the Great Depression.

“Capitalism still works and we can’t throw it overboard,” Nussle said. “We have to make the U.S. more attractive to investments if we are to be successful. We are still one of the best deals in town.”

Nussle marches with the GOP; the two percent of the budget that goes for earmarks is terrible (now that Democrats control them), and over 50 percent of the stimulus package is wasted on Congressmen’s reelection campaigns. He favors indirect use of government funding to boost the economy and cut taxes on the wealthiest taxpayers: Cut inheritance, capital gains, corporate and progressive income tax and replace them with a “flatter tax.” He ignored the failure of the Bush tax cuts for the rich, insisting they increased government revenue.

Rivlin supports progressive income taxes and proposes new taxes on carbon and changes in healthcare and mortgage deductions. Current tax deductions aren’t fair, she claims: While the top-income brackets get a 30 percent deduction, the bottom gets only 15 percent. A single rate for everyone would make deductions more equitable. We don’t pay a particularly high proportion of income in taxes compared to other countries and our government supports programs because people want them.

William K. Black, author of The Best Way to Rob a Bank is to Own One, contends that the calculated dishonesty of bankers perpetuated a huge fraud. Financial corporations made bad loans, grew rapidly and leveraged assets to increase executive compensation. With the bailout, powerful bankers have taken over the government.

Banks are bankrupt and remain solvent by behind the scenes manipulation and changing the “mark-to-market” rules to revalue toxic assets. As of February, the government has committed over $10 trillion as an investor, lender and insurer of bank debt and by September the Fed plans to print $14 for every $1 in circulation today. Will these moves alleviate the economic crisis or deepen it?

Behind the scenes, banks are rapidly reshifting power, wealth and control of the U.S. economy. We don’t know what the economy will look like in the future: We do know the past is gone, the wealthy increased their share of national wealth, and taxpayers are left to pay for it.

DON MONKERUD is an California-based writer who follows cultural, social and political issues. He can be reached at